Entrenched controlling shareholders and the performance consequences of corporate diversification in Taiwan |
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Authors: | Liu-Ching Tsai Chaur-Shiuh Young Hui-Wen Hsu |
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Institution: | (1) Department of Business Administration, National Chia-Yi University, No. 580, Sinmin Rd., Chia-Yi City, 600, Taiwan;(2) Department of Accountancy and Graduate Institute of Finance & Banking, National Cheng Kung University, No. 1, University Rd., Tainan City, 701, Taiwan;(3) Department of Accountancy and Graduate Institute of Finance & Banking, National Cheng Kung University, No. 1, University Rd., Tainan City, 701, Taiwan |
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Abstract: | The main purpose of this paper is to examine the value/performance effects of corporate diversification in an emerging market.
Prior evidence on this issue is still mixed. The present study adds the role of entrenched controlling shareholders into this
issue. We argue that when controlling shareholders have larger excess board seats control rights, they have higher ability
and incentive to expropriate minority shareholders through corporate diversification. Using a sample of firms listed on the
Taiwan Stock Exchange in 2003, we find that controlling shareholders’ excess board seats control is negatively associated
with the market valuation of corporate diversification. Consistently, we also document that highly diversified firms run by
more entrenched controlling shareholders have lower future financial performance than otherwise similar firms. Overall, our
findings imply that corporate diversification is not necessarily harmful or beneficial for firms. We conclude that the agency
problem arising from the excess board seats control rights owned by controlling shareholders is an influential factor leading
to negative performance consequences with regard to firm diversification. |
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