How Much of the Diversification Discount Can be Explained by Poor Corporate Governance?
University of Basel - Department of Finance
Markus M. Schmid
University of St. Gallen - Swiss Institute of Banking and Finance; University of St. Gallen - School of Finance
New York University - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance
New York University (NYU) - Stern School of Business
July 15, 2011
We investigate whether the diversification discount occurs partly as an artifact of poor corporate governance. In panel data models, we find that the discount narrows by 16% to 21% when we add governance variables as regression controls. We also estimate Heckman selection models that account for the endogeneity of diversification and dynamic panel generalized method of moments models that account for the endogeneity of both diversification and governance. We find that the diversification discount persists even with these controls for endogeneity. However, in selection models the discount disappears entirely when we introduce governance variables in the second stage, and in dynamic panel GMM models the discount narrows by 37% when we include governance variables.
Number of Pages in PDF File: 52
Keywords: Organizational structure, Diversification, Firm valuation, Corporate governance
JEL Classification: G32, G34
Date posted: February 11, 2009 ; Last revised: June 15, 2013