Are real options a missing piece in the diversification-value puzzle?

•An insight into the diversification-value puzzle from the real options approach•At early diversifying stages, exercising growth opportunities dominates.•At more advanced stages, diversification is mainly a source of growth opportunities.•Growth opportunities partly mediate the diversification-value relationship.•The more that diversification enhances the GOR, the higher the excess value.

This paper examines the impact of corporate diversification on a firm's market value in terms of changes in its mix of value sources between growth options and assets-in-place. We argue that the traditionally assumed replicability of corporate diversification benefits by individual investors might not be as feasible when diversification implies acquiring new growth options as when it only involves assets-in-place investments. We further explain why a different effect of diversification on a firm's mix of value sources can occur, therefore leading to a mediating role of growth options between diversification and market value. Using a panel sample of U.S. firms from 1998 to 2010, we find that a firm's growth options portfolio helps explain the effect of diversification strategy on its market value.