Corporate diversification, information asymmetry and insider trading

The 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 o...

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Main Authors:	Ali Ataullah, Ian R. Davidson, Hang Le, Geoffrey Wood
Format:	Default Article
Published:	2014
Subjects:	Other commerce, management, tourism and services not elsewhere classified untagged Business and Management not elsewhere classified
Online Access:	https://hdl.handle.net/2134/15908
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id	rr-article-9498236
record_format	Figshare
spelling	rr-article-94982362014-01-01T00:00:00Z Corporate diversification, information asymmetry and insider trading Ali Ataullah (1256280) Ian R. Davidson (7195655) Hang Le (2132395) Geoffrey Wood (433088) Other commerce, management, tourism and services not elsewhere classified untagged Business and Management not elsewhere classified The 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. © 2012 British Academy of Management. 2014-01-01T00:00:00Z Text Journal contribution 2134/15908 https://figshare.com/articles/journal_contribution/Corporate_diversification_information_asymmetry_and_insider_trading/9498236 CC BY-NC-ND 4.0
institution	Loughborough University
collection	Figshare
topic	Other commerce, management, tourism and services not elsewhere classified untagged Business and Management not elsewhere classified
spellingShingle	Other commerce, management, tourism and services not elsewhere classified untagged Business and Management not elsewhere classified Ali Ataullah Ian R. Davidson Hang Le Geoffrey Wood Corporate diversification, information asymmetry and insider trading
description	The 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. © 2012 British Academy of Management.
format	Default Article
author	Ali Ataullah Ian R. Davidson Hang Le Geoffrey Wood
author_facet	Ali Ataullah Ian R. Davidson Hang Le Geoffrey Wood
author_sort	Ali Ataullah (1256280)
title	Corporate diversification, information asymmetry and insider trading
title_short	Corporate diversification, information asymmetry and insider trading
title_full	Corporate diversification, information asymmetry and insider trading
title_fullStr	Corporate diversification, information asymmetry and insider trading
title_full_unstemmed	Corporate diversification, information asymmetry and insider trading
title_sort	corporate diversification, information asymmetry and insider trading
publishDate	2014
url	https://hdl.handle.net/2134/15908
_version_	1797285192918892544

Corporate diversification, information asymmetry and insider trading

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