430 V. Maksimovic and G. Phillips
Fig. 1. Event-study showing the average wealth effect of focus changes for three groups of firms seg-
mented by the direction of focus change. The sample consists of fiscal years in the period 1978–1989 for
exchange-listed firms. Plotted points represent, for each group of firms, the average month-by-month value of
a SI initial investment in the firm less the corresponding month-by-month value of a $1 initial investment in
the CRSP equally-weighted market portfolio. Month zero is defined as the last month of the fiscal year of the
change in focus, Focus is measured by a Herfindahl index defined on revenue. There are 5,088 fiscal-years
with increases in the Herfindahl index, 4,469 with decreases, and 7,056 with no change. Source:Comment
and Jarrell (1995), Journal of Financial Economics, Vol. 74, p. 74.
We will be reviewing how the literature has addressed these issues in the remainder of
this chapter.
2.2. Initial caveats: The data
Research in firm organization is particularly tricky because researchers are required
to look inside the corporation to assess the efficiency of resource allocation between
various subunits. Such data is not readily available, and much of the data that is available
is subject to potential manipulation and reporting biases. The data problems mean that
researchers in this area must pay special attention to data issues and to the potential for
measurement error.
The principal data source for the early research on conglomerates is the Compus-
tat Industry Segment (CIS) database. Pursuant to the Statement of Financial Standards
(SFAS) No. 14 and SEC Regulation S-K, after 1977 firms were required to report cer-
tain audited segment information on segments whose assets, sales or profits are deemed