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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 Wood
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.

History

Publication status

  • Published

Journal

British Journal of Management

ISSN

1045-3172

Publisher

Wiley

Issue

2

Volume

25

Page range

228-251

Department affiliated with

  • Business and Management Publications

Full text available

  • No

Peer reviewed?

  • Yes

Legacy Posted Date

2013-04-26

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    University of Sussex (Publications)

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