||Corporate Governance and Diversification: The Agency Theory
||Institute of International Business
Diversification is becoming a trend these days. Investigating the relationship between diversification and firm’s performance over 2001-2005, this paper indicates that diversification impairs firm value. We would like to know why management pursues this value reduction strategy, especially focusing on the agency cost theory. From the empirical evidence, we find the level of diversification is negatively related to managerial equity ownership and to the proportion of outside directors. Besides, there exists no relationship between CEO duality and the magnitude of corporate diversification. Holding double positions of board of directors and CEO has no significant influence on firm’s diversification strategy. In conclusion, these findings suggest that agency problems are responsible for firms maintaining diversification. Finally, the study reveals that CEO’s compensation will increase as the level of diversification increases because of CEO entrenchment and ability matching.
Chapter 1. Introduction 1
Chapter 2. Literature Review and Research Hypotheses 4
2.1 Diversification and firm value 4
2.2 Diversification and corporate governance 6
2.3 Diversification and compensation 9
Chapter 3. Sample and Descriptive Statistic 11
3.1 Independent and Dependent Variable 11
3.2 Control Variables 13
3.3 Analysis 14
3.4 Sample collection 16
3.5 Statistic of Variable 16
Chapter 4. Empirical Results 19
4.1 Diversification and firm value 19
4.2 Diversification and corporate governance 22
4.3 Diversification and compensation 27
Chapter 5. Conclusion 30
List of Tables
Table 1 Descriptive Statistics of the Variables 18
Table 2 Regression result of diversification on ROA of Firm 20
Table 3 Regression result of diversification on ROE of Firm 21
Table 4 Regression result of corporate governance on 1-HHI 23
Table 5 Regression result of corporate governance on E 24
Table 6 Regression result of corporate governance on DD 25
Table 7 Regression result of diversification on CEO compensation 28
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