International Evidence on the Value of Product and Geographic Diversity

This paper examines the effect of geographic and industrial diversification on firm value for a sample of 1,914 corporations from 18 countries. Our results indicate that both geographic and product diversification destroy value at high levels of diversification, suggesting that agency and influence costs arising from the increased complexity outweigh the benefits of diversification at high degrees of diversification. Geographic diversification is found to be valuable, however, at low levels of diversification. We also find that insider ownership is related to less diversification, both across product and geographic segment, suggesting that insiders view corporate diversification as value destroying. JEL Classification: F23, G3, L2 * The World Bank, Financial Sector Vice Presidency, Room MC 9-620, 1818 H Street, 20009 Washington, DC, tel. 202-4582939, fax. 202-5222031, [email protected].