Aaltodoc publication archive (Aalto University institutional repository)
School of Business | Department of Finance | Finance | 2012
Thesis number: 12836
The effect of owner identity and investor protection on unrelated corporate diversification
|Title:||The effect of owner identity and investor protection on unrelated corporate diversification|
|Year:||2012 Language: eng|
|Department:||Department of Finance|
|Index terms:||rahoitus; financing; omistus; ownership; identiteetti; identity; sijoittajat; investors; riskienhallinta; risk management; yritykset; companies; toimialat; business branches; hajautus; decentralization|
» hse_ethesis_12836.pdf size:927 KB (948905)
|Key terms:||unrelated corporate diversification; owner identity; investor protection|
PURPOSE OF THE STUDY The effects of ownership structure and corporate governance mechanisms on corporate diversification have been widely investigated in corporate strategy research. However, majority of the previous studies have presumed that all owners have identical decision making objectives and motivation. This paper contributes to the existing knowledge on the implications of different owner identities by pointing out a link between owner identity and unrelated corporate diversification decision. In addition, this paper further investigates the association between unrelated corporate diversification and investor protection and demonstrates that the effect of owner identity on corporate decision making is dependent on the institutional environment.
DATA The company information used in the analysis is obtained from the Worldscope database. The sample consists of 2,956 publicly traded firms from 14 countries representing Common law, German civil law, French civil law and Scandinavian law countries. The analysis is effectively a cross-section of the year-end situation in 2010 and most of the data is from 2010 financial statements. The information on the identity and ownership share of the largest owner is manually collected from the Thomson ONE Banker database.
RESULTS The results show that the owner identity is an important factor in corporate decision making, and that there are significant differences in how owner identities behave in respect to corporate diversification decisions. Of all owner identities, unrelated corporate diversification is least common among private equity owners. I also observe a negative relationship between institutionally owned firms and unrelated corporate diversification. Further, the results show that unrelated corporate diversification is most common in German and French civil law countries, characterized with weak shareholder protection, and least prevalent in Common law environment known for high level of investor protection. In line with this, investor protection measures ASD and ADR are negatively associated with the level of unrelated corporate diversification. In addition, the results indicate that the influence of owner identity on corporate diversification decisions is dependent on the institutional background and owner identity plays bigger role in an environment characterized with weak shareholder protection.
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