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Corporate diversification, executive compensation and firm value: Evidence from Australia

Author

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  • Chongwoo Choe

    (Department of Economics, Monash University, Australia)

  • Tania Dey

    (Pricing and Analysis Group, Essential Services Commission of South Australia, Adelaide, Australia)

  • Vinod Mishra

    (Department of Economics, Monash University, Australia)

Abstract

We estimate the effect of corporate diversification on firm value using a sample of 766 segment-year observations during 2004–2008 for firms listed on the Australian Stock Exchange as of August 2009. In addition to conventionally used measures of diversification, we develop five new measures of diversification that explicitly take into account the degree to which a multi-segment firm’s various segments are in related lines of business. We use three different excess value measures to estimate the valuation effect of diversification. We find that multi-segment firms in our sample enjoyed a significant diversification premium that ranges from 12.4% to 18% depending on the measures of diversification and excess value. We also find some evidence that multi-segment firms benefit more from diversification when their executives are motivated more through long-term incentives such as stock and stock options.

Suggested Citation

  • Chongwoo Choe & Tania Dey & Vinod Mishra, 2014. "Corporate diversification, executive compensation and firm value: Evidence from Australia," Australian Journal of Management, Australian School of Business, vol. 39(3), pages 395-414, August.
    • Handle: RePEc:sae:ausman:v:39:y:2014:i:3:p:395-414
    DOI: 10.1177/0312896213499027
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    13. Jennifer Gippel & Tom Smith & Yushu Zhu, 2015. "Endogeneity in Accounting and Finance Research: Natural Experiments as a State-of-the-Art Solution," Abacus, Accounting Foundation, University of Sydney, vol. 51(2), pages 143-168, June.
    14. Hanh Thi My Le & Qian Long Kweh & Irene Wei Kiong Ting & Mohammad Nourani, 2022. "CEO power and earnings management: Dual roles of foreign shareholders in Vietnamese listed companies," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 1240-1256, January.
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