The Effect of Institutional Factors on the Value of Corporate Diversification

Advances in Strategic Management, Volume 32: Finance and Strategy, August 2014

43 Pages Posted: 21 Aug 2012 Last revised: 10 Sep 2014

Venkat Kuppuswamy

University of North Carolina Kenan-Flagler Business School

George Serafeim

Harvard University - Harvard Business School

Belen Villalonga

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

Date Written: August 10, 2012

Abstract

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.

Keywords: corporate diversification, industrial diversification, labor market efficiency, product market competition, competition, capital market efficiency, country competitiveness, conglomerates

JEL Classification: G4, M1, M4

Suggested Citation

Kuppuswamy, Venkat and Serafeim, George and Villalonga, Belen, The Effect of Institutional Factors on the Value of Corporate Diversification (August 10, 2012). Advances in Strategic Management, Volume 32: Finance and Strategy, August 2014. Available at SSRN: https://ssrn.com/abstract=2132676 or http://dx.doi.org/10.2139/ssrn.2132676

Venkat Kuppuswamy

University of North Carolina Kenan-Flagler Business School ( email )

Chapel Hill, NC 27599
United States

George Serafeim (Contact Author)

Harvard University - Harvard Business School ( email )

381 Morgan Hall
Boston, MA 02163
United States

HOME PAGE: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=ovr&facId=15705

Belen Villalonga

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

40 West 4th Street
New York, NY NY 10012
United States

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