Corporate Diversification in East Asia: The Role of Ultimate Ownership and Group Affiliation

32 Pages Posted: 20 Apr 2016

See all articles by Joseph P. H. Fan

Joseph P. H. Fan

The Chinese University of Hong Kong (CUHK) - School of Accountancy

Stijn Claessens

Bank for International Settlements (BIS)

Simeon Djankov

London School of Economics & Political Science (LSE); Peter G. Peterson Institute for International Economics

Larry H.P. Lang

The Chinese University of Hong Kong (CUHK) - Department of Finance

Date Written: November 1999

Abstract

Some East Asian firms diversify to circumvent external factor markets subject to high transaction costs. Other diversify as a means of expropriation by large stockholders. There is evidence that group affiliation is used to complement firm-level diversification in the creation of internal markets.

Using data for more than 2,000 companies from nine East Asian economies, Claessens, Djankov, Fan, and Lang examine the interactions between ultimate ownership, group affiliation, and corporate diversification. They find evidence that allocating resources within business groups is associated with higher market valuation when external markets are less developed.

They also find that group affiliation and firm-level diversification are used complementarily to exploit the relative cost-effectiveness of internal markets.

They reject the hypothesis that diversification patterns can be explained by large blockholders' incentive to reduce risk. But they find support for the hypothesis that controlling owners use diversification to expropriate other shareholders.

Group affiliation is widespread among publicly traded corporations in East Asia. Group-affiliated firms are on average associated with diversification discounts. Further analysis reveals that the discounts are attributable to diversified firms in the more developed East Asian economies. By contrast, group affiliation positively contributes to diversification performance in less developed economies.

The authors find that group-affiliated firms are more likely to diversify in developing economies but are equally likely to diversify in developed economies.

When diversifying in more developed economies, group-affiliated firms destroy more value than do independent firms. In developing economies, group-affiliated firms are more likely than independent firms to benefit from diversification in developing economies.

This paper - a product of the Financial Economics Unit, Financial Operations Vice Presidency - is part of a larger effort in the vice presidency to study corporate performance patterns in East Asia.

Suggested Citation

Fan, Po Hung Joseph P. H. and Claessens, Stijn and Djankov, Simeon and Lang, Hsien Ping Larry, Corporate Diversification in East Asia: The Role of Ultimate Ownership and Group Affiliation (November 1999). World Bank Policy Research Working Paper No. 2089. Available at SSRN: https://ssrn.com/abstract=615021

Po Hung Joseph P. H. Fan

The Chinese University of Hong Kong (CUHK) - School of Accountancy ( email )

Shatin, N.T.
Hong Kong
(852) 26097839 (Phone)
(852) 26035114 (Fax)

Stijn Claessens

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Simeon Djankov (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

Hsien Ping Larry Lang

The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )

Shatin, N.T.
Hong Kong
+85 2 2609 7761 (Phone)
+85 2 2603 6586 (Fax)

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