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Internal capital market efficiency and the diversification discount: The role of financial statement comparability

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  • Jia†Chi Cheng
  • Ruei†Shian Wu

Abstract

This paper investigates how financial statement comparability affects the efficiency of internal capital markets and diversification discounts in multi†segment firms through monitoring mechanisms. Previous studies suggest that financial statement comparability improves transparency and reduces the cost of information processing, mitigating information asymmetry between managers and shareholders. Using measures of comparability and internal capital efficiency, we find that financial statement comparability has a strong positive influence on internal capital market efficiency. Further, we find that by improving the efficiency of internal capital markets, financial statement comparability indeed mitigates diversification discounts. Especially, the effect of financial statement comparability is more pronounced for firms with high information asymmetry or operating environment volatility. The results support our arguments that financial statement comparability enhances the efficiency of internal capital markets and increases firm value in diversified firms by mitigating agency problems via monitoring and corporate control mechanisms.

Suggested Citation

  • Jia†Chi Cheng & Ruei†Shian Wu, 2018. "Internal capital market efficiency and the diversification discount: The role of financial statement comparability," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 45(5-6), pages 572-603, May.
    • Handle: RePEc:bla:jbfnac:v:45:y:2018:i:5-6:p:572-603
    DOI: 10.1111/jbfa.12307
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    Cited by:

    1. Biswas, Pallab Kumar & Habib, Ahsan & Ranasinghe, Dinithi, 2022. "Firm life cycle and financial statement comparability," Advances in accounting, Elsevier, vol. 58(C).
    2. repec:mth:ijafr8:v:8:y:2018:i:3:p:174-211 is not listed on IDEAS
    3. Zhang, Zhuang & Ntim, Collins G. & Zhang, Qingjing & Elmagrhi, Mohamed H., 2020. "Does accounting comparability affect corporate employment decision-making?," The British Accounting Review, Elsevier, vol. 52(6).
    4. Chen Zheng & Bing Zhu, 2021. "Concentrate or diversify? The relationship between tenant concentration and REIT performance," Review of Quantitative Finance and Accounting, Springer, vol. 57(3), pages 899-927, October.
    5. Lien Duong & Thu Phuong Truong, 2021. "The role of target’s financial statement comparability in the efficiency of takeover decisions," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(4), pages 5731-5743, December.
    6. Peng Hu & Xuming Li & Nian Li & Yiying Wang & Derek D. Wang, 2024. "Peeking into Corporate Greenwashing through the Readability of ESG Disclosures," Sustainability, MDPI, vol. 16(6), pages 1-23, March.
    7. Marcus L. Caylor & Dennis J. Chambers & Sunay Mutlu, 2022. "Financial reporting uniformity: Its relation to comparability and its impact on financial statement users," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(9-10), pages 1457-1488, October.

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