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

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jbankfin.2005.08.005 Byline: Pornsit Jiraporn (a), Young Sang Kim (b), Wallace N. Davidson (c), Manohar Singh (d) Keywords: Diversification; Corporate governance; Shareholder rights 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. Author Affiliation: (a) Department of Accounting, Economics and Finance, Texas A&M International University, Laredo, TX 78041, United States (b) Department of Economics and Finance, Northern Kentucky University, Highland Heights, KY 41099, United States (c) Department of Finance, College of Business and Administration, Southern Illinois University, Carbondale, United States (d) Atkinson Graduate School of Management, Willamette University, Salem, United States Article History: Received 22 September 2004; Accepted 29 August 2005