Corporate Governance, Shareholder Rights and Firm Diversification: An Empirical Analysis
Pennsylvania State University - School of Graduate Professional Studies (SGPS)
Young Sang Kim
Northern Kentucky University - Haile/US Bank College of Business
Wallace N. Davidson III
Southern Illinois University at Carbondale - Department of Finance
Willamette University - Atkinson Graduate School of Management
June 1, 2005
Journal of Banking and Finance, Vol. 30, No. 3, 2006
Grounded in agency theory, this study investigates how the strength of shareholder rights influences the extent of firm diversification and the excess value attributable to diversification. The empirical evidence reveals that the strength of shareholder rights is inversely related to the probability to diversify. Furthermore, firms where shareholder rights are more suppressed by restrictive corporate governance suffer a deeper diversification discount. Specifically, we document a 1.1-1.4% decline in firm value for each additional governance provision imposed on shareholders. An explicit distinction is made between global and industrial diversification. Our results support agency theory as an explanation for the value reduction in diversified firms. The evidence in favor of agency theory appears to be more pronounced for industrial diversification than for global diversification.
Number of Pages in PDF File: 33
Keywords: Diversification, corporate governance, shareholder rights
JEL Classification: G30, G32, G34
Date posted: August 11, 2005 ; Last revised: October 24, 2008
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