Disclosure Quality and the Excess Value of Diversification
60 Pages Posted: 28 Oct 2002
Date Written: October 2002
For a sample of U.S. firm years spanning the time period 1980 through 1996 we document a positive association between the excess value of diversification as defined by Berger and Ofek  and security analyst ratings of voluntary disclosure as developed by the Association for Investment Management and Research (i.e., AIMR rankings). Our results are not attributable to differences in proxies for firm performance or information environment. Moreover, we find no relation between the excess values of single segment firms and their AIMR rankings. Taken together, these phenomena suggest that disclosure plays a monitoring role in disciplining management's operating decisions. We also examine an alternative proxy for disclosure quality that captures the degree of segment disaggregation, and document a positive association between this measure and excess value. Additional analyses of the association between non-market based measures of performance (i.e., return on assets) and our disclosure proxies provide mixed support for the monitoring effect hypothesis.
Keywords: diversification, voluntary disclosure, governance, valuation
JEL Classification: M41, M45, G34
Suggested Citation: Suggested Citation