We are grateful for many helpful comments from Sridhar Gogineni, Jun-Koo Kang, Young Seok Park, seminar participants at Hallym University, session participants at the 2006 Financial Management Association meetings in Salt Lake City, Utah, USA and 2006 Korean Finance Association meetings. We thank Jinwoo Park (editor) and two anonymous referees for additional valuable comments and suggestions. All remaining errors are our own.
Corporate Diversification, Relatedness, and Firm Value: Evidence from Korean Firms*
Article first published online: 22 MAR 2010
2008 Korean Securities Association
Asia-Pacific Journal of Financial Studies
Volume 37, Issue 6, pages 1025–1064, December 2008
How to Cite
Bae, S. C., Kwon, T. H. and Lee, J. W. (2008), Corporate Diversification, Relatedness, and Firm Value: Evidence from Korean Firms. Asia-Pacific Journal of Financial Studies, 37: 1025–1064. doi: 10.1111/j.2041-6156.2008.tb00002.x
- Issue published online: 22 MAR 2010
- Article first published online: 22 MAR 2010
- Received 02 March 2007; Accepted 11 July 2008.
- Related Diversification;
- Unrelated Diversification;
- Korean Firms;
- Korean Financial Crisis;
- Chaebol Affiliation
We examine the valuation effects of diversification activities for Korean firms by diversification type and the occasion of the Korean financial crisis. Employing a unique dataset of 2,894 firm-years for the entire manufacturing industries, we find that diversification by Korean firms on average decreases firm value but its effect varies by the type of diversification. While unrelated diversification erodes firm value, related diversification is associated with a non-negative effect on firm value. These valuation effects are more pronounced before the crisis than after the crisis. Our results also show an important role of a firm's affiliation to a large business group, known as chaebols, that related diversification by chaebol-affiliated firms comes with a significant value gain. We further find that the different valuation effects of unrelated and related diversification are closely related to a firm's ownership concentration and financial leverage. Our results are robust to different samples and regression model specifications.