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Corporate diversification, information asymmetry and insider trading
journal contribution
posted on 2023-06-08, 06:18 authored by Ataullah Ali, Ian Davidson, Le Hang, Geoffrey WoodThe literature suggests that corporate diversification destroys firm value. This value destruction is usually considered to be a consequence of managers' pursuing diversification strategies to benefit themselves rather than to increase firm value. This paper provides evidence that casts doubt on this agency theory-based explanation for corporate diversification. Evidence based on insider trading suggests that managers themselves consider their diversification strategies to be value-increasing. Specifically, it is documented that corporate insiders (directors) purchase more of their firms' shares in the open market when corporate diversification is high. Moreover, insiders purchase more when the level of diversification discount is high, suggesting that they disagree with outside investors' undervaluation due to diversification. It is also found that the market reaction to insiders' purchases is positively related to corporate diversification. This result suggests that outsiders consider the amount of favourable information contained in insiders' purchases to increase with the extent of corporate diversification.
History
Publication status
- Published
Journal
British Journal of ManagementISSN
1045-3172Publisher
WileyExternal DOI
Issue
2Volume
25Page range
228-251Department affiliated with
- Business and Management Publications
Full text available
- No
Peer reviewed?
- Yes
Legacy Posted Date
2013-04-26Usage metrics
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