The real option theory suggests that firm value should include the value of real options，i．e．a firm has the option to expand a profitable business or the option to liquidate assets of a less profitable business．For a diversified firm,each segment has similar options．Applying the option-based valuation to a multi-segment firm at only the firm level neglects the real option value of its segments and could lead to mispricing and subsequent abnormal returns．Using segment data from 1981 to 2006，we find that a hedge portfolio buying diversified firms with the highest decile of real option value of segments(RVS)and selling those with the lowest decile of RVS earns a significant 11．7％size-adjusted abnormal returns in the next year．The hedge returns are positive in 22 of 26 total sample years．We also find that the hedge returns are more significant for firms with high growth or with good corporate governance．Further investigations indicate that firms improve operating income by exercising their segment-level real options and that abnormal retums concentrate around subsequent earnings announcements．Lastly,our finding provides an alternative explanation for the well-documented diversification discount.