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Corporate Diversification, Executive Compensation, And Firm Value: Evidence From Australia

  • Chongwoo Choe
  • Tania Dey
  • Vinod Mishra
  • In-Uck Park

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. In estimating the valuation effect of diversification, we use three excess value measures used by Lang and Stulz (1994) and Berger and Ofek (1995). 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.

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File URL: http://www.buseco.monash.edu.au/eco/research/papers/2012/3612corporatechoedeymishrapark.pdf
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Paper provided by Monash University, Department of Economics in its series Monash Economics Working Papers with number 36-12.

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Length: 36 pages
Date of creation: Sep 2012
Date of revision:
Handle: RePEc:mos:moswps:2012-36
Contact details of provider: Postal: Department of Economics, Monash University, Victoria 3800, Australia
Phone: +61-3-9905-2493
Fax: +61-3-9905-5476
Web page: http://www.buseco.monash.edu.au/eco/
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  1. Choe, Chongwoo & Yin, Xiangkang, 2009. "Diversification discount, information rents, and internal capital markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(2), pages 178-196, May.
  2. Karl V. Lins & Henri Servaes, 2002. "Is Corporate Diversification Beneficial in Emerging Market?," Financial Management, Financial Management Association, vol. 31(2), Summer.
  3. Karl Lins & Henri Servaes, 1999. "International Evidence on the Value of Corporate Diversification," Journal of Finance, American Finance Association, vol. 54(6), pages 2215-2239, December.
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