The paper by Rajan, Servaes, and Zingales explores the costs of diversity in diversified firms, particularly the "diversification discount" and inefficient investment allocation. The authors develop a model where headquarters have limited power and cannot enforce precise sharing rules among divisional managers. They argue that this leads to a misallocation of resources towards the most inefficient divisions, with the distortion being more pronounced when the investment opportunities across divisions are diverse. Empirical tests on a panel of U.S. diversified firms from 1979 to 1993 support these findings, showing that diversified firms allocate more resources to divisions with worse opportunities and that the extent of this misallocation is positively related to the diversity of investment opportunities. The paper also finds that the value of diversified firms is negatively related to the extent of this misallocation and the diversity of investment opportunities. The authors conclude that the diversity of investment opportunities has an adverse effect on firm value, even after correcting for the misallocation of funds.The paper by Rajan, Servaes, and Zingales explores the costs of diversity in diversified firms, particularly the "diversification discount" and inefficient investment allocation. The authors develop a model where headquarters have limited power and cannot enforce precise sharing rules among divisional managers. They argue that this leads to a misallocation of resources towards the most inefficient divisions, with the distortion being more pronounced when the investment opportunities across divisions are diverse. Empirical tests on a panel of U.S. diversified firms from 1979 to 1993 support these findings, showing that diversified firms allocate more resources to divisions with worse opportunities and that the extent of this misallocation is positively related to the diversity of investment opportunities. The paper also finds that the value of diversified firms is negatively related to the extent of this misallocation and the diversity of investment opportunities. The authors conclude that the diversity of investment opportunities has an adverse effect on firm value, even after correcting for the misallocation of funds.