Corporate diversification in Thailand

Abstract

Using the data of firms listed on the Stock Exchange of Thailand during 1996 to 2000, excluding financial institutions as well as rehabilitation firms, the study finds that on average corporate diversification is a value reduction strategy for the sample firms. When the effects of change in diversification level are investigated, it is documented that there is no association between the stock returns and the change in the level of diversification. However, there is negative relation between the change in number of segment and the firm’s performance as measured by the Tobin’s Q. The study also examines why management pursue the value reduction strategy focusing on the investigation of agency costs explanations. The results show that there is no relation between the managerial ownership and the diversification. But it is found that there is positive association between the managerial compensation and the diversification level. The evidence seems to be consistent with the “entrenchment” argument. This result holds when the joint effects between the managerial and entrenchment arguments are taken into account. Finally the study documents the negative association between the proportion of large shareholders and the likelihood of diversification, suggesting that concentration of holding seems to be effective in controlling the value destruction strategy.