An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Chaur - Shiuh Young
National Chung Cheng University

Liu - Ching Tsai
National Chia - Yi University

Hui - Wen Hsu
National Chung Cheng University

Abstract: Prior empirical evidence on the diversification discount is mixed in emerging markets. The present study argues that the value of corporate diversification is contingent on the ability of controlling shareholders to expropriate minority shareholders. For a sample of firms listed on Taiwan Stock Exchange (TSE) in 2003, we find that corporate diversification decreases corporate value and this value-decreasing effect is more severe when the board seats control rights and cash flow rights of controlling shareholders are more divergent. Consistently, this study also documents that accounting performance of a diversified firm run by entrenched controlling shareholders will deteriorates more than an otherwise similar firm. Our evidence from Taiwan’s firms mainly supports the notion that controlling shareholders with relatively large control of the board but small ownership are more likely to run the diversified firm for their personal interests rather than maximizing firm value.

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