446 V. Maksimovic and G. Phillips
Fig. 3. Market-to-book value contour plot.one industry are likely to be relatively less productive in the other industries and thus
are more likely to operate in a single industry. Firms whose organizations are not highly
adapted to any one industry are less focused. By contrast, if organizational talent is not
industry-specific, so thatd 1 =d 2 , all firms divide their production equally between the
industries. In this case, there is no relation between productivity and focus, and there
are no differences in productivity across segments. Larger firms, however, are more
productive than smaller firms across all segments.
We can show this relation between the productivity in industry 1(d 1 )and productivity
in industry 2(d 2 )graphically. InFigure 3, we plot “iso-valuation” lines, plotting a
firm’s market-value-to-book-value (replacement cost of assets) ratio as a function of its
productivity in industry 1(d 1 )and 2(d 2 ).^22 We can define a firm’s market over book as
follows:
(3)
MV
BOOK
=
d 1 p 1 k 1 +d 2 p 2 k 2 −αl^21 −αl 22 −β(l 1 +l 2 )^2
r 1 k 1 +r 2 k 2.
The axes ofFigure 3are a firm’s productivity in productivity in industry 1(d 1 )and
2 (d 2 ). The band (the height if the graph were 3D) of the graph tells us the amount
produced in each industry and equivalently the average market value to book value of
(^22) In this simple context the market-to-book ratio is equivalent to Tobin’sQ.