Inefficient Investment and the Diversification Discount: Evidence from Corporate Asset Purchases

:  We provide evidence that investment efficiency considerations are important in assessing changes in firm value surrounding asset purchases. We account for both the potential endogeneity in purchase decisions and the measurement error in Tobin's q. We find that post-purchase, there are significant declines in both excess value and investment efficiency. This trend occurs primarily among those firms that demonstrate increased diversity following purchases. The change in excess value for diversity-increasing buyers is positively related to the change in investment allocation surrounding the purchase.