Hostname: page-component-cd9895bd7-7cvxr Total loading time: 0 Render date: 2024-12-25T19:54:13.241Z Has data issue: false hasContentIssue false
  • English
  • Français

Capital Market Development, International Integration, Legal Systems, and the Value of Corporate Diversification: A Cross-Country Analysis

Published online by Cambridge University Press:  06 April 2009

Larry Fauver ,
Joel Houston  and
Andy Naranjo
Larry Fauver
Affiliation:
lfauver@miami.edu, University of Miami, Department of Finance, PO Box 248094, Coral Gables, FL 33124;
Joel Houston
Affiliation:
joel.houston@cba.ufl.edu, University of Florida, Warrington College of Business, Department of Finance, PO Box 117168, Gainesville, FL 32611.
Andy Naranjo
Affiliation:
andy.naranjo@cba.ufl.edu, University of Florida, Warrington College of Business, Department of Finance, PO Box 117168, Gainesville, FL 32611.
Get access Rights & Permissions [Opens in a new window]

Abstract

Using a database of more than 8,000 companies from 35 countries, we find that the value of corporate diversification is related to the level of capital market development, international integration, and legal systems. Our results suggest that the financial, legal, and regulatory environments each have an important influence on the value of diversification. Moreover, the optimal organizational structure and corporate governance may be very different for firms operating in emerging markets than they are for firms operating in more developed and internationally integrated countries.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 38 , Issue 1 , March 2003 , pp. 135 - 158
Copyright
Copyright © School of Business Administration, University of Washington 2003

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Bekaert, G., and Harvey, C.. “Time-VaryingWorld Market Integration.” Journal of Finance, 50 (1995), 403–444.Google Scholar
Bekaert, G., and Harvey, C.. “Foreign Speculators and Emerging Equity Markets.” Journal of Finance, 55 (2000), 565–613.Google Scholar
Bekaert, G.; Harvey, C.; and Lumsdaine, R.. “Dating the Integration of World Equity Markets.” Journal of Financial Economics, 65 (2002), 203–247.CrossRefGoogle Scholar
Bekaert, G.; Harvey, C.; and Lundblad, C.. “Does Liberalization Spur Growth.” Working Paper, Duke and Columbia Univs. (2002).Google Scholar
Berger, P., and Ofek, E.. “Diversification's Effect on Firm Value.” Journal of Financial Economics, 37 (1995), 39–65.Google Scholar
Bhattacharya, U., and Daouk, H.. “TheWorld Price of Insider Trading.” Journal of Finance, 57 (2002), 75–108.CrossRefGoogle Scholar
Campa, J. M., and Kedia, S.. “Explaining the Diversification Discount.” Journal of Finance, 57 (2002), 1731–1762.CrossRefGoogle Scholar
Campbell, J. “Understanding Risk and Return.” Journal of Political Economy, 104 (1996), 298–345.CrossRefGoogle Scholar
Chen, Z., and Knez, P.. “Measurement of Market Integration and Arbitrage.” Review of Financial Studies, 8 (1995), 287–325.Google Scholar
Cho, D. C.; Eun, C.; and Senbet, L.. “International Arbitrage Pricing Theory: An Empirical Investigation.” Journal of Finance, 41 (1986), 313–329.Google Scholar
Claessens, S.; Djankov, S.; Fan, J.; and Lang, L.. “The Separation of Ownership and Control in East Asian Corporations.” Journal of Financial Economics, 58 (2000), 81–112.CrossRefGoogle Scholar
Claessens, S.; Djankov, S.; Fan, J.; and Lang, L.. “Disentangling the Incentive and Entrenchment Effects of Large Shareholdings.” Journal of Finance, 57 (2002), 2741–2771.CrossRefGoogle Scholar
Comment, R., and Jarrell, G.. “Corporate Focus and Stock Returns.” Journal of Financial Economics, 37 (1995), 67–87.CrossRefGoogle Scholar
Demsetz, H., and Lehn, K.. “The Structure of Corporate Ownership: Causes and Consequences.” Journal of Political Economy, 93 (1985), 1155–1177.CrossRefGoogle Scholar
Denis, D.; Denis, D.; and Sarin, A.. “Agency Problems, Equity Ownership, and Corporate Diversification.” Journal of Finance, 52 (1997), 135–160.CrossRefGoogle Scholar
Edison, H., and F.Warnock. “A Simple Measure of the Intensity of Capital Controls.” Working Paper, International Finance Discussion (2001).Google Scholar
Erb, C.; Harvey, C.; and Viskanta, T.. “Expected Returns Volatility in 135 Countries.” Journal of Portfolio Management, 22 (1996), 46–58.CrossRefGoogle Scholar
Gertner, R.; Scharfstein, D.; and Stein, J.. “Internal versus External Capital Markets.” Quarterly Journal of Economics, 109 (1994), 1211–1230.Google Scholar
Graham, J; Lemmon, M.; and Wolf, J.. “Does Diversification Destroy Value?” Journal of Finance, 57 (2002), 695–720.CrossRefGoogle Scholar
Gultekin, M.; Gultekin, N. B.; and Penati, A.. “Capital Controls and International Capital Market Segmentation: The Evidence from the Japanese and American Stock Markets.” Journal of Finance, 44 (1989), 849–869.Google Scholar
Hadlock, C.; Ryngaert, M.; and Thomas, S.. “Corporate Structure and Equity Offerings: Are There Benefits to Diversification?” Journal of Business, 74 (2001), 613–635.CrossRefGoogle Scholar
Harris, M., and Raviv, A.. “The Capital Budgeting Process, Incentives and Information.” Journal of Finance, 51 (1996), 1139–1174.CrossRefGoogle Scholar
Harvey, C.; Lins, K.; and Roper, A.. “The Effect of Capital Structure when Expected Agency Costs are Extreme.” Working Paper, Duke Univ. (2001).Google Scholar
Holderness, C., and Sheehan, D.. “Constraints on Large-Block Shareholders.” In Concentrated Corporate Ownership, National Bureau of Economic Research. Chicago, IL: Univ. of Chicago Press (2000).Google Scholar
J., Houston; James, C.; and Marcus, D.. “Capital Market Frictions and the Role of Internal Capital Markets in Banking.” Journal of Financial Economics, 46 (1997), 135–164.Google Scholar
Hubbard, G., and Palia, D.. “A Re-examination of the Conglomerate Wave in the 1960s: An Internal Capital Market View.” Journal of Finance, 54 (1999), 1131–1152.CrossRefGoogle Scholar
John, K., and Ofek, E.. “Asset Sales and Increase in Focus.” Journal of Financial Economics, 37 (1995), 105–126.Google Scholar
Johnson, S.; La Porta, R.; Lopez-de-Silanes, F.; and Shleifer, A.. “Tunneling.” American Economic Review, Papers and Proceedings (2000), 22–27.CrossRefGoogle Scholar
Jorion, P., and Schwartz, E.. “Integration versus Segmentation in the Canadian Stock Market.” Journal of Finance, 41 (1986), 603–613.CrossRefGoogle Scholar
Khanna, N., and Tice, S.. “The Bright Side of Internal Capital Markets.” Journal of Finance, 56 (2001), 1489–1528.Google Scholar
Khanna, T., and Palepu, K.. “Is Group Affiliation Profitable in Emerging Markets? An Analysis of Diversified Indian Business Groups.” Journal of Finance, 55 (2000), 867–891.CrossRefGoogle Scholar
King, R., and Levine, R.. “Finance and Growth: Schumpeter May be Right.” Quarterly Journal of Economics, 108 (1993a), 717–737.Google Scholar
King, R., and Levine, R.. “Finance, Entrepreneurship, and Growth: Theory and Evidence.” Journal of Monetary Economics, 32 (1993b), 513–542.CrossRefGoogle Scholar
Lamont, O. “Cash Flow and Investment: Evidence from Internal Capital Markets.” Journal of Finance, 52 (1997), 83–109.Google Scholar
Lamont, O., and Polk, C.. “Does Diversification Destroy Value? Evidence from the Industry Shocks.” Journal of Financial Economics, 63 (2002), 51–77.CrossRefGoogle Scholar
Lang, L., and Stulz, R.. “Tobin's q, Corporate Diversification and Firm Performance.” Journal of Political Economy, 102 (1994), 1248–1280.Google Scholar
La Porta, R.; Lopez-de-Silanes, F.; and Shleifer, A.. “Corporate Ownership around the World.” Journal of Finance, 54 (1999), 471–517.Google Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R.. “Legal Determinants of External Finance.” Journal of Finance, 52 (1997), 1131–1150.CrossRefGoogle Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R.. “Law and Finance.” Journal of Political Economy, 106 (1998), 1115–1155.Google Scholar
Levine, R. “Financial Development and Economic Growth: Views and Agenda.” Journal of Economic Literature, 35 (1997), 688–726.Google Scholar
Lins, K. “Equity Ownership and Firm Value in Emerging Markets. Journal of Financial and Quantitative Analysis, 38 (2003), 159–184.CrossRefGoogle Scholar
Lins, K., and Servaes, H.. “International Evidence on the Value of Corporate Diversification.” Journal of Finance, 54 (1999), 2215–2239.CrossRefGoogle Scholar
Lins, K., and Servaes, H.. “Is Corporate Diversification Beneficial in Emerging Markets?” Financial Management, 31 (2002), 5–31.Google Scholar
Lins, K.; Strickland, D.; and Zenner, M.. “Do Non-U.S. Firms Issue Equity on U.S. Stock Exchanges to Relax Capital Constraints?” Working Paper, Univ. of North Carolina (2001).Google Scholar
Maksimovic, V., and Phillips, G.. “Do Conglomerate Firms Allocate Resources Inefficiently across Industries? Theory and Evidence.” Journal of Finance, 57 (2002), 721–767.Google Scholar
McConnell, J., and Servaes, H.. “Additional Evidence on Equity Ownership and Corporate Value.” Journal of Financial Economics, 27 (1990), 595–612.Google Scholar
Mittoo, U. “Additional Evidence on Integration in the Canadian Stock Market.” Journal of Finance, 47 (1992), 2035–2054.CrossRefGoogle Scholar
Morck, R.; Shleifer, A.; and Vishny, R.. “Management Ownership and Market Valuation: An Empirical Analysis.” Journal of Financial Economics, 20 (1988), 293–315.Google Scholar
Naranjo, A., and Protopapadakis, A.. “Financial Market Integration Tests: An Investigation Using U.S. Equity Markets.” Journal of International Financial Markets, Institutions and Money, 7 (1997), 93–135.Google Scholar
Rajan, R.; Servaes, H.; and Zingales, L.. “The Cost of Diversity: Diversification Discount and Inefficient Investment.” Journal of Finance, 55 (2000), 35–80.Google Scholar
Rajan, R., and Zingales, L.. “Financial Dependence and Growth.” American Economic Review, 88 (1998), 559–586.Google Scholar
Scharfstein, D. “The Dark Side of Internal Capital Markets II: Evidence from Diversified Conglomerates.” Working Paper 6352, NBER (1998).Google Scholar
Scharfstein, D., and Stein, J.. “The Dark Side of Internal Capital Markets: Divisional Rent-Seeking and Inefficient Investment.” Journal of Finance, 55 (2000), 2537–2564.Google Scholar
Shin, H., and Stulz, R.. “Are Internal Capital Markets Efficient?” Quarterly Journal of Economics, 113 (1998), 531–552.Google Scholar
Stein, J. “Internal Capital Markets and the Competition for Corporate Resources.” Journal of Finance, 52 (1997), 111–133.CrossRefGoogle Scholar
Stulz, R. “Globalization, Corporate Finance, and the Cost of Capital.” Journal of Applied Corporate Finance, 12 (1999), 8–25.Google Scholar
Stulz, R. “Financial Structure, Corporate Finance and Economic Growth.” International Review of Finance, 1 (2000), 11–38.Google Scholar
Wheatley, S. “Some Tests of International Equity Integration.” Journal of Financial Economics, 21 (1988), 177–212.CrossRefGoogle Scholar
Whited, T. “Is it Inefficient Investment that Causes the Diversification Discount?” Journal of Finance, 56 (2001), 1667–1691.Google Scholar
Williamson, O.Markets and Hierarchies, Analysis and Antitrust Implications: A Study in the Economics of Internal Organization. New York, NY: Collier Macmillan Publishers, Inc. (1975).Google Scholar