Agency Problems,Equity Ownership,and Corporate Diversification

We provide evidence on the agency cost explanation for corporate diversification. We find that the level of diversification is negatively related to managerial equity ownership and to the equity ownership of outside blockholders. In addition, we report that decreases in diversification are associated with external corporate control threats, financial distress, and management turnover. These findings suggest that agency problems are responsible for firms maintaining value-reducing diversification strategies and that the recent trend toward increased corporate focus is attributable to market disciplinary forces.     

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

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.     

Corporate Diversification: What Gets Discounted?

Prior literature finds that diversified firms sell at a discount relative to the sum of the imputed values of their business segments. We explore this documented discount and argue that it stems from risk–reducing effects of corporate diversification. Consistent with this risk–reduction hypothesis, we find that (a) shareholder losses in diversification are a function of firm leverage, (b) all equity firms do not exhibit a diversification discount, and (c) using book values of debt to compute excess value creates a downward bias for diversified firms. Overall, the results indicate that diversification is insignificantly related to excess firm value.     

Governance quality and privately negotiated stock repurchases: Evidence of agency conflict

This study examines the impact of shareholder rights on the wealth effects of privately negotiated stock repurchases. Our results show that wealth gains are lower when shareholder rights are more suppressed. We also find that the premium paid for shares is inversely related to the strength of shareholder rights, and this suggests that managers pay higher premiums when shareholder rights are more restricted. These findings imply that managers use shareholders’ funds to eliminate blockholders who are more likely to monitor them when shareholder rights are relatively weak, thereby entrench themselves. Consistent with this view, we further show that significant positive abnormal long-run returns after private stock repurchases are limited to firms with stronger shareholder protection. Overall, the evidence is consistent with the predictions of agency theory.     

Governance and Performance Implications of Diversification Strategies: Evidence from Large U.S. Firms

Recent research focuses on explaining the diversification discount. However, there is little direct evidence regarding the relation among ownership structure, corporate governance, and corporate diversification. The results in this paper suggest that agency issues do not account for firms adopting a particular diversification strategy. Also, the performance consequences of the shift in the diversification strategy and the subsequent changes in institutional and block ownership structures are not related to agency issues. In fact, investors seem not to avoid diversified firms per se. We suggest that observed board and ownership differences between diversified and focused firms are due to their being at different stages of corporate evolution.     

Diversification,corporate governance and firm value in small markets: evidence from New Zealand

We find that diversified firms in New Zealand are associated with a value discount of 19–42 per cent relative to single‐segment (undiversified) firms. Although several competing explanations have been offered in the literature, we find that the strength of corporate governance explains between 15–21 per cent of this discount. Specifically, board size, busyness of directors, CEO ownership and whether or not compensation of directors includes equity‐based components collectively explain a large part of the reported discount. Our results from companies trading in New Zealand complement recent findings in the US by not only confirming the existence of a diversification discount but also emphasizing the role of poor governance in destroying shareholder wealth by pursuing a value‐destroying corporate strategy. All our results hold after controlling for potential endogeneity in the decision to diversify and the choice of corporate governance structure by employing two‐way fixed‐effects and dynamic‐panel generalized method of moments regression techniques.     

International Evidence on the Value of Corporate Diversification

The valuation effect of diversification is examined for large samples of firms in Germany, Japan, and the United Kingdom for 1992 and 1994. We find no significant diversification discount in Germany, but a significant diversification discount of 10 percent in Japan and 15 percent in the U.K. Concentrated ownership in the hands of insiders enhances the valuation effect of diversification in Germany, but not in Japan or the U.K. For Japan, only firms with strong links to an industrial group have a diversification discount. These findings suggest that international differences in corporate governance affect the impact of diversification on shareholder wealth.     

Do managers listen to the market?

There are competing theories as to whether managers learn from stock prices. Dye and Sridhar (2002), for example, argue that capital markets can be better informed than the firm itself, while Roll [Roll, R., 1986, “The hubris hypothesis of corporate takeovers,” Journal of Business 59, 97–216.] argues managers may ignore market signals due to hubris. In this paper, we examine whether managers listen to the market in making major corporate investments, and whether agency costs and corporate governance mechanisms help explain managers' propensity to listen. We find that, on average, managers listen to the market: they are more likely to cancel investments when the market reacts unfavorably to the related announcement. Further, we find mixed evidence consistent with the notion that managers' propensity to listen is related to agency costs. We find that firms tend to listen to the market more when more of their shares are held by large blockholders, and when their CEOs have higher pay-performance sensitivities.     

The Rise of Agency Capitalism and the Role of Shareholder Activists in Making It Work

The past 50 years have seen a fundamental change in the ownership of U.S. public companies, one in which the relatively small holdings of many individual shareholders have been supplanted by the large holdings of institutional investors, such as pension funds, mutual funds, and bank trust departments. Such large institutional investors are now said to own over 70% of the stock of the largest 1,000 U.S. public corporations; and in many of these companies, as the authors go on to note, “as few as two dozen institutional investors” own enough shares “to exert substantial influence, if not effective control.” But this reconcentration of ownership does not represent a complete solution to the “agency” problems arising from the “separation of ownership and control” that troubled Berle and Means, the relative powerlessness of shareholders in the face of a class of “professional” corporate managers who owned little if any stock. As the authors note, this shift from an era of “managerial capitalism” to one they identify as “agency capitalism” has come with a somewhat new and different set of “agency conflicts” and associated costs. The fact that most institutional investors hold highly diversified portfolios and compete (and are compensated) on the basis of “relative performance” provides them with little incentive to engage in the vigorous monitoring of corporate performance and investor activism that could address shortfalls in such performance. As a consequence, such large institutional investors—not to mention the large and growing body of indexers like Vanguard and BlackRock—are likely to appear “rationally apathetic” about corporate governance. But, as the authors also point out, there is a solution to this agency conflict—and to the corporate governance “vacuum” that has been said to result from the alleged apathy of well‐diversified (and indexed) institutional investors: the emergence of shareholder activists. The activist hedge funds and other specialized activists who have come on the scene during the last 15 or 20 years are now playing an important role in supporting this relatively new ownership structure. Instead of taking control positions, the activists “tee‐up” strategic business and financing choices that are then decided upon by the vote of institutional shareholders that are best characterized not as apathetic, but as rationally “reticent”; that is, they allow the activists, if not to do their talking for them, then to serve as a catalyst for the expression of institutional shareholder voice. The institutions are by no means rubber stamps for activists' proposals; in some cases voting for the activists' proposals, in many cases against them, the institutions function as the long‐term arbiters of whether such proposals should and will go forward. In the closing section of the article, the authors discuss a number of recent legal decisions that appear to recognize this relatively new role played by activists and the institutions that choose to support them (or not)—legal decisions that appear to confirm investors' competence and right to be entrusted with such authority over corporate decision‐making.     

多元化与资本成本的关系——来自中国股票市场的证据

根据期权定价模型,多元化降低了公司风险,但其受益者是债权人,而不是股东,这使得公司部分财富从股东手中转移到债权人手中,由此降低了股东财富,因此,多元化可能并不为股东所欢迎,从而多元化公司的权益资本成本可能高于专业化公司。同时,由于内部资本市场在公司内部的资源再配置作用,使得公司降低了对融资成本较高的外部资本市场的依赖,因此,多元化经营公司的总资本成本可能低于专业化经营公司。本文以2001—2004年我国上市公司为例,对多元化与公司权益资本成本和总资本成本之间的关系进行了实证检验。研究结果表明,多元化与权益资本成本正相关,而与总资本成本负相关。     

The impact of geographic diversification on firm performance

This paper empirically examines the economic effects of both corporate industrial and geographic diversifications. Using a sample of 28,050 firm-year observations from 1990 to 1998, we find that industrial and geographic diversifications are associated with firm value decrease. Consistent with Denis et al. [Denis, D. J., Denis, D. K., and Yost, K. (2002). Global diversification, industrial diversification, and firm value. Journal of Finance, 57, 1951-1979], the costs of corporate diversification may outweigh the benefits of diversification. We find that geographically diversified firms have higher R&D expenditures, advertising expenses, operating income, ROE and ROA than industrially diversified firms. In addition, higher R&D expenditures create value for multi-segment global firms, but not for single-segment global firms. This result implies that there exists an interaction effect between industrial and geographic diversification. We also examine the effects of agency cost issues, as characterized by the diversification discount, on both industrial and geographic diversification. Consistent with the agency explanation, firms with high equity-based compensation are associated with higher firm value than firms with low equity-based compensation. Also, we find that firms with a higher insider ownership percentage are associated with higher excess value.     

The Case for Maximizing Long‐Run Shareholder Value

Criticism of the shareholder model of corporate governance stems in part from misunderstanding about what shareholder wealth maximization means for the other stakeholders of public companies. The corporate goal of shareholder wealth maximization does not imply that such stakeholders “do not matter.” Managers maximize shareholder value by maximizing the total expected cash flows available to distribute to all of their stakeholders. To maximize such cash flows, managers must provide their customers with desirable goods and services at attractive prices—which in turn requires that managers attract the employees, suppliers, and financial capital needed to conduct their businesses by providing each of these groups with market‐determined returns on their contributions to firm value. In this way, successful corporations benefit all of their stakeholders, and what is good for the corporation is generally good for society. External forces such as the media and government exert considerable influence on corporate actions and, in so doing, they play a role in helping to limit negative corporate “externalities” such as pollution and climate change. But direct regulation of productive activities should be used sparingly, and subjected to ongoing cost‐benefit analysis. Government regulation replaces the collective decisions of a broad marketplace of stakeholders using their own resources to act in their own interests with decisions made by government officials with complicated incentives and using resources generated by others. More generally, government should seek to regulate corporate actions only in the limited situations in which there are no market solutions for reducing the effects of externalities. For example, government plays a critically important role in identifying and deterring corporate fraud, and in ensuring competition and a level playing field for companies and all their stakeholders.     

Causes and effects of corporate refocusing programs

We study the precursors and outcomes of refocusing episodesby 107 diversified firms that were not taken over between 1984and 1993. These firms had more value-reducing diversificationpolicies than diversified firms that did not refocus. However,major disciplinary or incentive-altering events (including managementturnover, outside shareholder pressure, changes in managementcompensation, and financial distress) usually occurred beforerefocusing took place. The cumulative abnormal returns overa firm's refocusing-related announcements averaged 7.3% andwere significantly related to the amount of value reductionassociated with the refocuser's diversification policy.     

Corporate governance and capital allocations of diversified firms

We examine how various aspects of corporate governance structures affect the capital allocation inefficiency that drives the value discounts of diversified firms. Diversified firms with more effective internal or external governance mechanisms experience more efficient investment allocations at both the firm and segment levels and show less of a diversification discount. The efficiency of the investment allocation process is better for diversified firms with high board independence, low board busyness, high institutional ownership, high outside director ownership, high CEO equity-based pay, high audit quality, and strong shareholder rights. The results hold after controlling for other potential influences. Our evidence suggests that corporate governance considerations are important in assessing the relation between investment efficiency and firm value for diversified firms.     

Corporate diversification,ownership structure,and firm value: The Singapore evidence

We provide international evidence on the level and value of corporate diversification using a sample of 145 Singapore firms. We find that the level of diversification is positively related to firm size and negatively related to the equity ownership of outside blockholders. However, we find no evidence that insider ownership has a significant impact on the level of diversification. We find significant value loss from diversification only for those firms with low managerial ownership, suggesting that value-reducing diversification stems from agency problems. Outside block ownership does not have a significant impact on the value of diversification. Thus, while outside blockholders may act as a deterrent on the level of diversification, there is no evidence that they can effectively reduce the agency problems for those firms with low managerial ownership.     

Is the diversification discount caused by the book value bias of debt?

We analyze whether the diversification discount is driven by the book value bias of corporate debt. Book values of debt may be a more downward biased proxy of the market value of debt for diversified firms, relative to undiversified firms, as diversification leads to lower firm risk. Thus, measures of firm value based on book values of debt undervalue diversified firms relative to focused firms. Our paper complements recent literature which uses market values to test the risk reduction hypothesis for a subsample of firms for which debt is traded. Alternatively, we employ market value of debt estimates for the whole firm universe. Consistent with the above hypothesis, we show that the use of book values of debt underestimates the value of diversified firms. There is no discount for mainly equity financed firms and lower distress risk and equity volatility for diversified firms. More concentrated ownership increases firm valuation.     

Costly refocusing,the diversification discount,and the pervasiveness of diversified firms

I develop a stationary real options model with corporate restructuring costs that endogenously generates a diversification discount. This result requires that restructuring costs associated with spin-offs (refocusing moves) be significantly larger than those associated with acquisitions (diversifying moves). The discount is due to the fact that diversified firms performing poorly will still delay refocusing, given the high cost of implementing this strategy. The model delivers the counter-intuitive implication that the higher the (average) discount observed in the economy, the higher the (average) proportion of diversified firms.     

Conglomerate Investment,Skewness, and the CEO Long‐Shot Bias

Do behavioral biases of executives matter for corporate investment decisions? Using segment‐level capital allocation in multisegment firms (“conglomerates”) as a laboratory, we show that capital expenditure is increasing in the expected skewness of segment returns. Conglomerates invest more in high‐skewness segments than matched stand‐alone firms, and trade at a discount, which indicates overinvestment that is detrimental to shareholder wealth. Using geographical variation in gambling norms, we find that the skewness‐investment relation is particularly pronounced when CEOs are likely to find long shots attractive. Our findings suggest that CEOs allocate capital with a long‐shot bias.     

Managerial personal diversification and portfolio equity incentives

This paper examines the diversification choices of top managers and their implications for the levels of portfolio equity incentives as well as for firms' financial policies. Standard portfolio theory should also apply to corporate managers and therefore excessive risk exposures to the firm should create portfolio diversification incentives for the managers. We use a unique dataset from the Taiwan tax data center and construct the measures of the degree of diversification in a manager's equity portfolio that is made up of equities of other firms to capture his motives for diversifying his risk exposure to his own firm. We provide empirical evidence supporting the view that managers have a risk-reduction motive when they trade in the equities of other firms besides their own. Moreover, we document evidence that the degree of diversification in such equity portfolios also significantly affects managerial equity incentives as well as firms' financial policies. Overall, our findings confirm that managers' personal diversification can help make up for the diversification that the managers would otherwise have lost, thereby reducing the agency cost of equity incentive contracts.     

Large Shareholdings and Corporate Control: An Analysis of Stake Purchases by French Holding Companies

The paper analyses the value creation benefits of the holding form of organisation in France by empirically examining the effects of non-controlling stake purchases on target shareholder wealth, operational performance and bidder shareholder returns for a sample of 122 stake purchases in French listed companies. The evidence puts into question the ability of holding companies to create value for the firms they purchase stakes in or their own shareholders, adding to the current debate on the relative role played by large shareholders and the external market for corporate control as ultimate disciplining devices.