This paper explores the phenomenon of the diversification discount, where diversified firms trade at a lower price relative to similar single-segment firms. The authors argue that this discount is not necessarily evidence that diversification destroys value. Instead, they suggest that firms choose to diversify based on characteristics that also make them undervalued. The study uses data from the Compustat Industry Segment File from 1978 to 1996 to select a sample of single-segment and diversifying firms. Three econometric techniques are used to control for the endogeneity of the diversification decision, all of which indicate that there is self-selection in the decision to diversify and a negative correlation between firms' choice to diversify and firm value. The diversification discount drops or turns into a premium when these endogeneity issues are controlled for. A similar analysis is conducted for refocusing firms, where some evidence of self-selection exists and a positive correlation between the choice to refocus and firm value is found. The results consistently suggest that the endogeneity of diversification status must be considered when analyzing its effect on firm value.This paper explores the phenomenon of the diversification discount, where diversified firms trade at a lower price relative to similar single-segment firms. The authors argue that this discount is not necessarily evidence that diversification destroys value. Instead, they suggest that firms choose to diversify based on characteristics that also make them undervalued. The study uses data from the Compustat Industry Segment File from 1978 to 1996 to select a sample of single-segment and diversifying firms. Three econometric techniques are used to control for the endogeneity of the diversification decision, all of which indicate that there is self-selection in the decision to diversify and a negative correlation between firms' choice to diversify and firm value. The diversification discount drops or turns into a premium when these endogeneity issues are controlled for. A similar analysis is conducted for refocusing firms, where some evidence of self-selection exists and a positive correlation between the choice to refocus and firm value is found. The results consistently suggest that the endogeneity of diversification status must be considered when analyzing its effect on firm value.