The measurement of relatedness: An application to corporate diversification

Employing commodity flow data from input-output (IO) tables, we construct two IO-based measures to capture interindustry and intersegment vertical relatedness and complementarity. At the industry level, we demonstrate that the new IO-based measures outperform traditional measures based on Standard Industry Classification (SIC) codes. At the firm level, we report that firms increase their degree of vertical relatedness and complementarity over time. The increasing pattern is robust; it is not sensitive to accounting changes in segment definition, different weighting methods, and different IO data employed. As an application, we examine the valuation effects of relatedness in the context of corporate diversification.