Diversification Discount and Corporate Governance in Japan

Tatsuo Ushijima

Public Policy Review, 2015, vol. 11, issue 3, 427-450

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.

Keywords: diversification; firm value; agency problems; corporate governance (search for similar items in EconPapers)
JEL-codes: G32 G34 (search for similar items in EconPapers)
Date: 2015
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