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Related Diversification, Agency Costs, and Shareholder Value

Author

Listed:
  • Cronqvist, Henrik

    (Dept. of Finance, Stockholm School of Economics)

  • Högfeldt, Peter

    (Dept. of Finance, Stockholm School of Economics)

  • Nilsson, Mattias

    (Dept. of Finance, Stockholm School of Economics)

Abstract

Using data from real estate corporations, we report that related diversification over different property types is associated with a discount while geographical diversification has no significant effect on shareholder value. Related diversification in order to exploit potential synergistic gains does not improve operating performance as measured by return on assets (ROA). Applying an ex ante measure, which discriminates between focusing and non-focusing corporate strategies, we find that corporations expected to pursue non-focusing (diversifying or unclear) strategies are valued at a 20% discount, and are controlled by large private owners. This ex ante diversification discount is a measure of agency costs associated with highly concentrated private ownership. Expected corporate strategy is a previously neglected but more fundamental determinant of shareholder value than contemporaneous focus per se.

Suggested Citation

  • Cronqvist, Henrik & Högfeldt, Peter & Nilsson, Mattias, 1998. "Related Diversification, Agency Costs, and Shareholder Value," SSE/EFI Working Paper Series in Economics and Finance 219, Stockholm School of Economics.
    • Handle: RePEc:hhs:hastef:0219
    Note: This working paper is replaced by no. 294
    as

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    More about this item

    Keywords

    Related diversification; agency costs; peso effect; shareholder value.;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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