Corporate Diservication

The Pattern and Valuation Effects of Corporate Diversification: A Comparison of the United States, Japan, and Other East Asian Economies

Stijn Claessens, Simeon Djankov, Joseph Fan, and Larry Lang1

October 17, 2000

Abstract We document that firms in eight East Asian countries and Japan diversify into more segments and engage into more related businessesas measured by the degree of vertical relatedness and complementaritythan firms in the United States. Using data for the 1990-1996 period, we observe a trend towards complementary diversification in the United States and the eight East Asian countries, and a trend towards more vertical integration in Japan. The increase in relatedness for US firms is due to the divestiture of unrelated assets. In contrast, the increase in relatedness for firms in Japan and East Asia is due to expansion into related businesses. We also document the valuation effects of the diversification level, vertical relatedness and complementarity. We observe that diversification hurts the valuation of East Asian firms less than the valuation of firms in the Unites States and Japan. However, vertical diversification hurts the valuation of companies in East Asian more than the valuation of US and Japanese firms. Complementary diversification is not detrimental to corporate value, and even enhances value in the United States, Japan, Korea, and Singapore.

1

World Bank, World Bank and CEPR, Hong Kong University of Science and Technology, and the Chinese University of Hong Kong, respectively. This paper is a substantially revised version of a previous paper circulated under the title “Diversification and Efficiency of Investment by East Asian Corporations.” Joseph P.H. Fan and Larry H. P. Lang gratefully acknowledge the Hong Kong UGC Earmarked grant for research support. The authors would like to thank the anonymous referee, Gregor Andrade, Joel Houston, Shin-yang Hu, Sabrina Kwan, Tatiana Nenova, Rene Stulz, seminar participants at the...