How Much of the Diversification Discount Can Be Explained by Poor Corporate Governance?

32 Pages Posted: 8 Dec 2009 Last revised: 10 Sep 2013

See all articles by Daniel Hoechle

Daniel Hoechle

FHNW School of Business - Institute for Finance; University of Basel - Department of Finance

Markus Schmid

University of St. Gallen - Swiss Institute of Banking and Finance; University of St. Gallen - School of Finance

Ingo Walter

New York University - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance

David Yermack

New York University (NYU) - Stern School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: November 2009

Abstract

We investigate whether the diversification discount is simply a proxy for poor corporate governance. We find that the negative value impact of diversification is amplified by adverse governance variables such as low CEO ownership, low board independence, and board classification, and that approximately 25% to 30% of the diversification discount can be attributed to suboptimal governance choices by conglomerate firms. Our methodology includes a dynamic panel GMM estimator that accounts for the endogeneity of the diversification decision and corporate governance, plus an event study analysis of diversifying mergers. Even after controlling for governance, the diversification discount remains negative and significant.

Suggested Citation

Hoechle, Daniel and Schmid, Markus and Walter, Ingo and Yermack, David, How Much of the Diversification Discount Can Be Explained by Poor Corporate Governance? (November 2009). NYU Working Paper No. 2451/28341. Available at SSRN: https://ssrn.com/abstract=1519253

Daniel Hoechle

FHNW School of Business - Institute for Finance ( email )

Peter Merian-Strasse 86
Basel, CH-4002
Switzerland
+41 61 279 17 73 (Phone)

University of Basel - Department of Finance ( email )

Peter Merian-Weg 6
Basel, CH-4002
Switzerland

Markus Schmid

University of St. Gallen - Swiss Institute of Banking and Finance ( email )

Rosenbergstrasse 52
St. Gallen, 9000
Switzerland

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Ingo Walter

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY 10012
United States
212-998-0707 (Phone)
212-995-4220 (Fax)

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

David Yermack (Contact Author)

New York University (NYU) - Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY 10012-1126
United States
212-998-0357 (Phone)
212-995-4220 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~dyermack

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