Analyst Coverage And The Diversification Discount

Abstract

We use financial analyst coverage as a measure of information asymmetry to examine excess firm values associated with single- and multi-segment firms. We explicitly examine whether differences in analyst coverage can explain the diversification discount. We find that information asymmetry plays a major role in the valuation of companies and explains a large portion of the diversification discount. However, a significant diversification discount remains after controlling for the effects of analyst coverage.