Corporate Governance, Shareholder Rights and Firm Diversification: An Empirical Analysis

33 Pages Posted: 11 Aug 2005 Last revised: 24 Oct 2008

Pornsit Jiraporn

Pennsylvania State University - School of Graduate Professional Studies (SGPS)

Young Sang Kim

Northern Kentucky University - Haile/US Bank College of Business

Wallace N. Davidson III

Southern Illinois University at Carbondale - Department of Finance

Manohar Singh

Willamette University - Atkinson Graduate School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2005

Abstract

Grounded in agency theory, this study investigates how the strength of shareholder rights influences the extent of firm diversification and the excess value attributable to diversification. The empirical evidence reveals that the strength of shareholder rights is inversely related to the probability to diversify. Furthermore, firms where shareholder rights are more suppressed by restrictive corporate governance suffer a deeper diversification discount. Specifically, we document a 1.1-1.4% decline in firm value for each additional governance provision imposed on shareholders. An explicit distinction is made between global and industrial diversification. Our results support agency theory as an explanation for the value reduction in diversified firms. The evidence in favor of agency theory appears to be more pronounced for industrial diversification than for global diversification.

Keywords: Diversification, corporate governance, shareholder rights

JEL Classification: G30, G32, G34

Suggested Citation

Jiraporn, Pornsit and Kim, Young Sang and Davidson, Wallace N. and Singh, Manohar, Corporate Governance, Shareholder Rights and Firm Diversification: An Empirical Analysis (June 1, 2005). Journal of Banking and Finance, Vol. 30, No. 3, 2006. Available at SSRN: https://ssrn.com/abstract=775144

Pornsit Jiraporn

Pennsylvania State University - School of Graduate Professional Studies (SGPS) ( email )

30 E. Swedesford Road
Malvern, PA 19355
United States
(484) 753-3655 (Phone)

HOME PAGE: http://www.personal.psu.edu/pxj11/index1.html

Young Sang Kim (Contact Author)

Northern Kentucky University - Haile/US Bank College of Business ( email )

Dept of Economics and Finance
Highland Heights, KY 41099
United States
859-572-5160 (Phone)
859-572-6627 (Fax)

Wallace N. Davidson III

Southern Illinois University at Carbondale - Department of Finance ( email )

Mail Code 4626
Carbondale, IL 62901-4626
United States
618-453-1429 (Phone)
618-453-5626 (Fax)

Manohar Singh

Willamette University - Atkinson Graduate School of Management ( email )

900 State Street
Salem, OR 97301
United States

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