Can diversification create value? Evidence from the electric utility industry

Despite SEC and state-level resistance, and contrary to the trend pursued by other firms, many electric utilities have diversified into and unregulated businesses. Moreover, this failure to focus has been rewarded with higher firm values, again contrary to the discounts documented in the literature for or other diversfying firms. Prior literature has questioned whether these premiums (or discounts) can be attributed to diversification per se. Rather these premiums could arise from the characteristics of the diversfying firms, which have then endogenously chosen to diversify. In a new approach, where regulation can make the diversification decision largely exogenous, we examine the investment policies of the comparable electric-segments it? the diversifying and non-diversfying utilities. We find that single-segment electric utilities over invest compared to diversfying utilities, which explains their diversification premiums and implies that diversification can create value by opening up new investment opportunities.