The Effect of Institutional Factors on the Value of Corporate Diversification
University of North Carolina Kenan-Flagler Business School
Harvard University - Harvard Business School
New York University (NYU) - Leonard N. Stern School of Business
August 10, 2012
Advances in Strategic Management, Volume 32: Finance and Strategy, August 2014
Using a large sample of diversified firms from 38 countries we investigate the influence of several national-level institutional factors or ‘institutional voids’ on the value of corporate diversification. Specifically, we explore whether the presence of frictions in a country’s capital markets, labor markets, and product markets, affect the excess value of diversified firms. We find that the value of diversified firms relative to their single-segment peers is higher in countries with less efficient capital and labor markets, but find no evidence that product market efficiency affects the relative value of diversification. These results provide support for the theory of internal capital markets that argues that internal capital allocation would be relatively more beneficial in the presence of frictions in the external capital markets. In addition, the results show that diversification can be beneficial in the presence of frictions in the labor market.
Number of Pages in PDF File: 43
Keywords: corporate diversification, industrial diversification, labor market efficiency, product market competition, competition, capital market efficiency, country competitiveness, conglomerates
JEL Classification: G4, M1, M4
Date posted: August 21, 2012 ; Last revised: September 10, 2014
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