Technological Specialization and Corporate Diversification∗

We document a trend towards fewer and more-focused conglomerates, and develop a model that explains these patterns based on increasing technological specialization. In the model, diversification adds value by allowing efficient within-firm resource reallocation. However, synergies decrease with technological specialization, leading to fewer diversified firms over time. Also, the optimal level of technological diversity across conglomerate divisions decreases with technological specialization, leading to more-focused conglomerates. The calibrated model matches the evolution of conglomerate pervasiveness and focus, and other empirical magnitudes: growing output, level and trend of the diversification discount, frequency and returns of diversifying mergers, and frequency of refocusing activity.