Does corporate diversification reduce shareholder value? Since firms endogenously choose to diversify, exogenous variation in diversification is necessary to draw inferences about the causal effect. We examine changes in the within-firm dispersion of industry investment, or “diversity”. We find that exogenous changes in diversity, due to changes in industry investment, are negatively related to firm value. Thus diversification destroys value, consistent with the inefficient internal capital markets hypothesis. Measurement error does not cause this finding. We also find that exogenous changes in industry cash flow diversity are negatively related to firm value.