T HE conglomerate activity of the sixties has generated considerable interest in the effects of corporate diversification. Enquiry has centered on two related questions-how well do diversified firms perform vis-a-vis specialized companies, and if they perform differently, why do they do so? With respect to these questions, this paper presents qualified evidence which suggests that diversified firms outperform their specialized counterparts, other things equal, and that the source of the superior performance is the synergy that arises from diversification.'