Belén Villalonga examines whether the "diversification discount" in stock markets is caused by diversification itself. Using recent econometric methods for causal inference, she matches diversified and specialized firms based on propensity scores—predicted values from a probit model of diversification decisions. She finds that when a more comparable benchmark based on propensity scores is used, the diversification discount disappears or even turns into a premium. This challenges the notion that diversification reduces firm value, as previously found by studies like Wernerfelt and Montgomery (1988), Lang and Stulz (1994), and Berger and Ofek (1995). Villalonga's analysis suggests that the discount may be due to other factors, such as firm size or industry characteristics, rather than diversification per se. She also finds that the effect of diversification on firm value is not consistently negative, and that the relationship between diversification and performance is complex. The study highlights the importance of using proper causal inference methods to avoid biased estimates when analyzing the effects of diversification on firm value. The results suggest that the "diversification discount" may not be a direct result of diversification, but rather a reflection of other factors that influence firm value.Belén Villalonga examines whether the "diversification discount" in stock markets is caused by diversification itself. Using recent econometric methods for causal inference, she matches diversified and specialized firms based on propensity scores—predicted values from a probit model of diversification decisions. She finds that when a more comparable benchmark based on propensity scores is used, the diversification discount disappears or even turns into a premium. This challenges the notion that diversification reduces firm value, as previously found by studies like Wernerfelt and Montgomery (1988), Lang and Stulz (1994), and Berger and Ofek (1995). Villalonga's analysis suggests that the discount may be due to other factors, such as firm size or industry characteristics, rather than diversification per se. She also finds that the effect of diversification on firm value is not consistently negative, and that the relationship between diversification and performance is complex. The study highlights the importance of using proper causal inference methods to avoid biased estimates when analyzing the effects of diversification on firm value. The results suggest that the "diversification discount" may not be a direct result of diversification, but rather a reflection of other factors that influence firm value.