Is Corporate Diversification Beneficial in Emerging Markets?

Abstract

Using a sample of over one thousand firms from seven emerging markets (Hong Kong, India, Indonesia, Malaysia, Singapore, South Korea, and Thailand) at the end of 1995, we find that diversified firms trade at a discount of approximately seven percent compared to single-segment firms. Diversified firms are also less profitable than single-segment firms, but lower profitability only explains part of the discount. We find a discount only for firms that are part of industrial groups, and for diversified firms with management ownership concentration between 10 percent and 30 percent; there is no evidence of a discount for firms with lower or higher ownership concentration. The discount is most severe when management control rights substantially exceed their cash flow rights. Our results provide little evidence of internal capital market efficiency in economies with severe capital market imperfections.