Real Options and the Diversication Discount

Lang and Stulz (1994) and Berger and Ofek (1995) documented that multi-segment diversiedrms trade at a discount relative to the sum of the market values of comparable single-segmentrms. Bernardo and Chowdhry (1999) o®er one possible explanation for the diversication discount: the market value of single-segmentrms in- clude the value of real options to diversify and expand in other seg- ments whereas multi-segment diversiedrms have perhaps exhausted their options to diversify and expand. In this paper, we document ev- idence that the diversication discount is increasing in variables that proxy for real options. In particular, wend that the diversication discount is increasing in R&D expenditures of single-segmentrms, decreasing in the age of the single-segmentrms, and increasing in market volatility.