Entrenched controlling shareholders and the performance consequences of corporate diversification in Taiwan

Liu Ching Tsai, Chaur-Shiuh Young, Hui Wen Hsu

Research output: Contribution to journalArticlepeer-review

6 Citations (Scopus)

Abstract

The main purpose of this paper is to examine the value/performance effects of corporate diversification in an emerging market. Prior evidence on this issue is still mixed. The present study adds the role of entrenched controlling shareholders into this issue. We argue that when controlling shareholders have larger excess board seats control rights, they have higher ability and incentive to expropriate minority shareholders through corporate diversification. Using a sample of firms listed on the Taiwan Stock Exchange in 2003, we find that controlling shareholders' excess board seats control is negatively associated with the market valuation of corporate diversification. Consistently, we also document that highly diversified firms run by more entrenched controlling shareholders have lower future financial performance than otherwise similar firms. Overall, our findings imply that corporate diversification is not necessarily harmful or beneficial for firms. We conclude that the agency problem arising from the excess board seats control rights owned by controlling shareholders is an influential factor leading to negative performance consequences with regard to firm diversification.

Original languageEnglish
Pages (from-to)105-126
Number of pages22
JournalReview of Quantitative Finance and Accounting
Volume37
Issue number1
DOIs
Publication statusPublished - 2011 Jul 1

All Science Journal Classification (ASJC) codes

  • Accounting
  • Business, Management and Accounting(all)
  • Finance

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