• Innovation Capability, Corporate Governance, and the Excess Values of Diversified Firms-The Study of Electronic Industry in Taiwan

Abstract

Diversification is a one of popular business strategies for corporate expansion. However, literature finds that typical diversified firms are undervalued relatively to the comparable counterparts. Worse agency problem among divisions of diversified firms after firms diversify is viewed as one of the important reasons for the discount. Another issue related to firm diversification is innovation input. Studies on whether diversification may affect a firm’s research effect are conflicting and inconclusive. This paper is aimed to clarify the role of governance and innovation ability of diversified firms and link to the value discount. We find there is a significant difference between single- and multi-segment firms for some governance variables, such as the percentage of blockholders as the directors of board, deviation between voting right and cash flow right, the ratio of independent directors and related party transactions. In addition, the research and development expense ratio and the patent income rate of diversified firms are positively associated with the excess values of diversified firms. On average the diversified firms that employ better governance mechanisms experience higher market valuation, especially on the dimensions of firm ownership structure, managerial style and block shareholders’ intervention to the stock market. The results are still hold after we control for the effect of tax policy and information transparency which are shown to have the impact on the innovation and governance, respectively.

Keywords: Innovation Capability, Corporate Governance, Corporate Diversification