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31 Mar 2026, 21:56
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Granville and Coates’ analysis of North American heavy manufacturing found that companies operating across multiple industries generate more value, and therefore are valued more highly, than clusters of smaller, more specialized companies that have the same overall scope as the larger diversified corporation if considered together. Granville and Coates conjectured that the added premium reflects reduced earnings volatility: diversified firms can spread risk across multiple largely independent lines of business, reducing investors’ stochastic exposure to firm-specific shocks. After several scholars published remarkably parallel findings from other economic sectors, theoretical economists began in earnest to explore whether more general laws might be at work.
Those investigations were barely underway when Campa and Kedia shocked the field with their analysis of just-in-time and short-turnover supply chains, in which diversified corporations, almost without exception, were valued lower than the sum of the valuations at which their component operations would have been traded as separate corporate entities. Campa and Kedia called this pattern “the diversification discount”; they hypothesized that the companies’ discounted valuations were direct consequences of logistical inefficiencies born of diversification itself, such as cross-subsidization of underperforming divisions by more profitable ones or knots of intra-corporate conflicts that made it effectively impossible for the company to boost any component of its valuation without a diminution in another one.
Villalonga et al, by contrast, looked further back, unpacking the motivational factors behind companies’ original diversification initiatives. They found in most cases that shortfalls in market valuation predated the companies’ acquisitions of further lines of business, reflecting fundamental inefficiencies that were already deeply embedded in the less-diversified companies’ core business operations. Noting a near-ubiquitous pattern of declining efficiency leading up to each company’s acquisition of new lines of business, Villalonga et al argue against the use of the term “diversification discount”, making a compelling case that companies often, perhaps even usually, diversify in an attempt to run away from, or at least to reduce the relative footprint of, dysfunctions too thoroughly entrenched to root out.
The primary purpose of the passage is to
A. argue, with counterevidence, that early hypotheses about the valuations of diversified corporations are flawed.
B. demonstrate that the cost or benefit to a corporation of acquiring additional lines of business is mainly a function of industry-specific conditions.
C. present contrasting sets of research findings with possible explanations for each.
D. show, through examples, that researchers analyzing the same data with the same methods can reach opposing conclusions.
E. summarize the original research behind a theory and the later findings that led to a refinement of that theory.
Those investigations were barely underway when Campa and Kedia shocked the field with their analysis of just-in-time and short-turnover supply chains, in which diversified corporations, almost without exception, were valued lower than the sum of the valuations at which their component operations would have been traded as separate corporate entities. Campa and Kedia called this pattern “the diversification discount”; they hypothesized that the companies’ discounted valuations were direct consequences of logistical inefficiencies born of diversification itself, such as cross-subsidization of underperforming divisions by more profitable ones or knots of intra-corporate conflicts that made it effectively impossible for the company to boost any component of its valuation without a diminution in another one.
Villalonga et al, by contrast, looked further back, unpacking the motivational factors behind companies’ original diversification initiatives. They found in most cases that shortfalls in market valuation predated the companies’ acquisitions of further lines of business, reflecting fundamental inefficiencies that were already deeply embedded in the less-diversified companies’ core business operations. Noting a near-ubiquitous pattern of declining efficiency leading up to each company’s acquisition of new lines of business, Villalonga et al argue against the use of the term “diversification discount”, making a compelling case that companies often, perhaps even usually, diversify in an attempt to run away from, or at least to reduce the relative footprint of, dysfunctions too thoroughly entrenched to root out.
The primary purpose of the passage is to
A. argue, with counterevidence, that early hypotheses about the valuations of diversified corporations are flawed.
B. demonstrate that the cost or benefit to a corporation of acquiring additional lines of business is mainly a function of industry-specific conditions.
C. present contrasting sets of research findings with possible explanations for each.
D. show, through examples, that researchers analyzing the same data with the same methods can reach opposing conclusions.
E. summarize the original research behind a theory and the later findings that led to a refinement of that theory.
31 Mar 2026, 21:56
Kudos
Bookmarks
Official Solution:
Granville and Coates’ analysis of North American heavy manufacturing found that companies operating across multiple industries generate more value, and therefore are valued more highly, than clusters of smaller, more specialized companies that have the same overall scope as the larger diversified corporation if considered together. Granville and Coates conjectured that the added premium reflects reduced earnings volatility: diversified firms can spread risk across multiple largely independent lines of business, reducing investors’ stochastic exposure to firm-specific shocks. After several scholars published remarkably parallel findings from other economic sectors, theoretical economists began in earnest to explore whether more general laws might be at work.
Those investigations were barely underway when Campa and Kedia shocked the field with their analysis of just-in-time and short-turnover supply chains, in which diversified corporations, almost without exception, were valued lower than the sum of the valuations at which their component operations would have been traded as separate corporate entities. Campa and Kedia called this pattern “the diversification discount”; they hypothesized that the companies’ discounted valuations were direct consequences of logistical inefficiencies born of diversification itself, such as cross-subsidization of underperforming divisions by more profitable ones or knots of intra-corporate conflicts that made it effectively impossible for the company to boost any component of its valuation without a diminution in another one.
Villalonga et al, by contrast, looked further back, unpacking the motivational factors behind companies’ original diversification initiatives. They found in most cases that shortfalls in market valuation predated the companies’ acquisitions of further lines of business, reflecting fundamental inefficiencies that were already deeply embedded in the less-diversified companies’ core business operations. Noting a near-ubiquitous pattern of declining efficiency leading up to each company’s acquisition of new lines of business, Villalonga et al argue against the use of the term “diversification discount”, making a compelling case that companies often, perhaps even usually, diversify in an attempt to run away from, or at least to reduce the relative footprint of, dysfunctions too thoroughly entrenched to root out.
The primary purpose of the passage is to
A. argue, with counterevidence, that early hypotheses about the valuations of diversified corporations are flawed.
B. demonstrate that the cost or benefit to a corporation of acquiring additional lines of business is mainly a function of industry-specific conditions.
C. present contrasting sets of research findings with possible explanations for each.
D. show, through examples, that researchers analyzing the same data with the same methods can reach opposing conclusions.
E. summarize the original research behind a theory and the later findings that led to a refinement of that theory.
To piece together the primary purpose, let’s summarize the contents of the passage at the per-paragraph level, in a sort of rough “table of contents”.
¶1:
• Studies: Diversification (add’l lines of business) —> Valued HIGHER than sum of parts
• Possible explanation
¶2:
• Studies: Diversification (add’l lines of business) —> Valued LOWER than sum of parts
• Possible explanations
¶3:
• Other possible explanations for the phenomenon in ¶2
• Differ on whether the issues are new (upon diversification) or pre-existing
Packing this up even more compactly to get it into approximately the same length as the answer choices presented here: we have studies with contrasting/opposite findings, and then potential (hypothetical) explanations for each set of findings.
That’s choice C.
Choice A is incorrect because the studies showing lower valuations after diversification do not contradict those showing higher valuations; in other words, the specifics in paragraphs 2 and 3 are not “counterevidence” to those in paragraph 1. (They would only be counterevidence if both sets of studies were done on the same companies over the same mergers and acquisitions. There is nothing to suggest any overlap; in fact, the author explicitly notes that the Campa and Kedia study covered a different industry than did the Granville and Coates study.)
None of the hypotheses advanced in the passage to explain the offset of diversified corporations’ valuations in either direction - either over or under the sum of valuations of their component businesses considered independently attribute any of those effects to industry-specific particulars, so choice B is unsupported.
Choice D, like choice A, relies on the notion that Campa and Kedia studied the same set of businesses over the same timeframes as Granville and Coates did. This is false, as discussed above under choice A.
Choice E is wrong because showing that the exact opposite of a theory’s predictions can also happen (for other reasons) is not a “refinement” of the original theory.
Answer: C
Granville and Coates’ analysis of North American heavy manufacturing found that companies operating across multiple industries generate more value, and therefore are valued more highly, than clusters of smaller, more specialized companies that have the same overall scope as the larger diversified corporation if considered together. Granville and Coates conjectured that the added premium reflects reduced earnings volatility: diversified firms can spread risk across multiple largely independent lines of business, reducing investors’ stochastic exposure to firm-specific shocks. After several scholars published remarkably parallel findings from other economic sectors, theoretical economists began in earnest to explore whether more general laws might be at work.
Those investigations were barely underway when Campa and Kedia shocked the field with their analysis of just-in-time and short-turnover supply chains, in which diversified corporations, almost without exception, were valued lower than the sum of the valuations at which their component operations would have been traded as separate corporate entities. Campa and Kedia called this pattern “the diversification discount”; they hypothesized that the companies’ discounted valuations were direct consequences of logistical inefficiencies born of diversification itself, such as cross-subsidization of underperforming divisions by more profitable ones or knots of intra-corporate conflicts that made it effectively impossible for the company to boost any component of its valuation without a diminution in another one.
Villalonga et al, by contrast, looked further back, unpacking the motivational factors behind companies’ original diversification initiatives. They found in most cases that shortfalls in market valuation predated the companies’ acquisitions of further lines of business, reflecting fundamental inefficiencies that were already deeply embedded in the less-diversified companies’ core business operations. Noting a near-ubiquitous pattern of declining efficiency leading up to each company’s acquisition of new lines of business, Villalonga et al argue against the use of the term “diversification discount”, making a compelling case that companies often, perhaps even usually, diversify in an attempt to run away from, or at least to reduce the relative footprint of, dysfunctions too thoroughly entrenched to root out.
The primary purpose of the passage is to
A. argue, with counterevidence, that early hypotheses about the valuations of diversified corporations are flawed.
B. demonstrate that the cost or benefit to a corporation of acquiring additional lines of business is mainly a function of industry-specific conditions.
C. present contrasting sets of research findings with possible explanations for each.
D. show, through examples, that researchers analyzing the same data with the same methods can reach opposing conclusions.
E. summarize the original research behind a theory and the later findings that led to a refinement of that theory.
To piece together the primary purpose, let’s summarize the contents of the passage at the per-paragraph level, in a sort of rough “table of contents”.
¶1:
• Studies: Diversification (add’l lines of business) —> Valued HIGHER than sum of parts
• Possible explanation
¶2:
• Studies: Diversification (add’l lines of business) —> Valued LOWER than sum of parts
• Possible explanations
¶3:
• Other possible explanations for the phenomenon in ¶2
• Differ on whether the issues are new (upon diversification) or pre-existing
Packing this up even more compactly to get it into approximately the same length as the answer choices presented here: we have studies with contrasting/opposite findings, and then potential (hypothetical) explanations for each set of findings.
That’s choice C.
Choice A is incorrect because the studies showing lower valuations after diversification do not contradict those showing higher valuations; in other words, the specifics in paragraphs 2 and 3 are not “counterevidence” to those in paragraph 1. (They would only be counterevidence if both sets of studies were done on the same companies over the same mergers and acquisitions. There is nothing to suggest any overlap; in fact, the author explicitly notes that the Campa and Kedia study covered a different industry than did the Granville and Coates study.)
None of the hypotheses advanced in the passage to explain the offset of diversified corporations’ valuations in either direction - either over or under the sum of valuations of their component businesses considered independently attribute any of those effects to industry-specific particulars, so choice B is unsupported.
Choice D, like choice A, relies on the notion that Campa and Kedia studied the same set of businesses over the same timeframes as Granville and Coates did. This is false, as discussed above under choice A.
Choice E is wrong because showing that the exact opposite of a theory’s predictions can also happen (for other reasons) is not a “refinement” of the original theory.
Answer: C
