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Diversification, corporate governance and firm value in small markets: evidence from New Zealand


  • This paper is based on research projects completed by André Bate and Nawaf AlMaskati as a requirement for the Master of Business (Finance) and Master of Commerce degrees at the University of Otago, Dunedin, New Zealand. We wish to thank Scott Smart, Timothy Crack, Vivien Pullar and seminar participants in the Department of Accountancy and Finance at the University of Otago for helpful suggestions. We take responsibility for all remaining errors.


We find that diversified firms in New Zealand are associated with a value discount of 19–42 per cent relative to single-segment (undiversified) firms. Although several competing explanations have been offered in the literature, we find that the strength of corporate governance explains between 15–21 per cent of this discount. Specifically, board size, busyness of directors, CEO ownership and whether or not compensation of directors includes equity-based components collectively explain a large part of the reported discount. Our results from companies trading in New Zealand complement recent findings in the US by not only confirming the existence of a diversification discount but also emphasizing the role of poor governance in destroying shareholder wealth by pursuing a value-destroying corporate strategy. All our results hold after controlling for potential endogeneity in the decision to diversify and the choice of corporate governance structure by employing two-way fixed-effects and dynamic-panel generalized method of moments regression techniques.