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Diversification Discount and Corporate Governance in Japan

Author

Listed:
  • Tatsuo Ushijima

    (Professor, Graduate School of International Management, Aoyama Gakuin University)

Abstract

It is widely reported that investors value U.S. firms operating in a diversity of industries less than focused firms in the same industries. Based on segmental reporting data of Japanese firms from 2004 to 2012, this paper examines whether such a discount for diversified firms exists and how corporate diversification and governance interact. Several important results are obtained. First, diversified Japanese firms are valued 6 to 7% less highly than focused firms. Second, corporate governance increases firm value, but this effect is attenuated for diversified firms. Third, a stronger governance system increases a firm fs probability of refocusing. These results suggest that managerial agency problems exist in the diversification of Japanese firms. In particular, managers who are ill-disciplined due to a weak governance system resist value-increasing restructuring actions, such as refocusing.

Suggested Citation

  • Tatsuo Ushijima, 2015. "Diversification Discount and Corporate Governance in Japan," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 11(3), pages 427-450, July.
    • Handle: RePEc:mof:journl:ppr029d
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    diversification; firm value; agency problems; corporate governance;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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