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Journal of Banking & Finance Vol. 30 No. 3 2006

Corporate governance, shareholder rights and firm diversification: An empirical analysis

Pornsit Jiraporn1,2; Young Sang Kim3,4; Wallace N. Davidson5; Manohar Singh6,7,8

1 Pennsylvania State University · 2 Texas A&M International University · 3 Highland Community College - Illinois · 4 Northern Kentucky University · 5 Southern Illinois University Carbondale · 6 Atkins (United States) · 7 Atkins (United Kingdom) · 8 Willamette University

open access

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.

DOI
10.1016/j.jbankfin.2005.08.005
Volume
30
Issue
3
Pages
947-963
Language
en
Sources
openalex crossref bibtex:phds-export.bib

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