Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 219: Related Diversification, Agency Costs, and Shareholder Value

Henrik Cronqvist (), Peter Högfeldt () and Mattias Nilsson ()
Additional contact information
Henrik Cronqvist: Dept. of Finance, Stockholm School of Economics, Postal: P.O. Box 6501, S-113 83 Stockholm, Sweden
Peter Högfeldt: Dept. of Finance, Stockholm School of Economics, Postal: P.O. Box 6501, S-113 83 Stockholm, Sweden
Mattias Nilsson: Dept. of Finance, Stockholm School of Economics, Postal: P.O. Box 6501, S-113 83 Stockholm, Sweden

Abstract: Using data from real estate corporations, we report that related diversification over different property types is associated with a discount while geographical diversification has no significant effect on shareholder value. Related diversification in order to exploit potential synergistic gains does not improve operating performance as measured by return on assets (ROA). Applying an ex ante measure, which discriminates between focusing and non-focusing corporate strategies, we find that corporations expected to pursue non-focusing (diversifying or unclear) strategies are valued at a 20% discount, and are controlled by large private owners. This ex ante diversification discount is a measure of agency costs associated with highly concentrated private ownership. Expected corporate strategy is a previously neglected but more fundamental determinant of shareholder value than contemporaneous focus per se.

Keywords: Related diversification; agency costs; peso effect; shareholder value.

JEL-codes: G30; G31; G32

45 pages, January 29, 1998

Note: This working paper is replaced by no. 294

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