Can Management Quality and Reputation Improve Diversification Discount?
Date Issued
2009
Date
2009
Author(s)
Shih, Yi-Chneg
Abstract
Berger and Ofek (1995) document that diversified firms are less efficient than comparable single-segment firms. As summarized by Stein (2003), one of most popular explanations for the “diversification discount” is the inefficient internal capital allocation across corporate divisions. Although the results in the previous literature are insightful, they do not consider the role of management quality and reputation in explaining the “diversification discount”. In this paper, I provide the robust empirical results to show that better management quality and reputation indeed enhance efficiencyf internal capital allocation of the diversified firms and furthermore, improve the diversification discount. After solving endogeneity of management quality andeputation, I still find the same empirical evidence. Besides, I also find seven common factors to measure management quality and reputation which include the management team size factor (MTS), the management team tenure factor (MTT), the CEO’s working experience factor (CEO_EXPERIENCE),the management team age factor (MTA), theanagement team education level factor (MTE), the management team professional factor (MTP) and the CEO’s dominance factor (CEO_DOMINANCE). Finally, the empirical results could explain partially the “diversification discount puzzle” that Lang and Stulz (1994) and Berger and Ofek (1995) provide. Managers with poor managementuality and reputation will bring about larger diversification discounts than Berger and Ofek (1995)’s empirical results. In contrast, managers with better management quality and reputation will result in smaller diversification discounts than Berger and Ofek (1995)’s empirical results.
Subjects
Management Quality and Reputation
Corporate Diversification
Diversification Discount
Top Management Team
Investments Efficiency
Internal Capital Allocation
Type
thesis
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