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Corporate diversification, information asymmetry and insider trading

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Ataullah, Ali, Davidson, Ian, Le, Hang and Wood, Geoffrey (2014) Corporate diversification, information asymmetry and insider trading. British Journal of Management, Volume 25 (Number 2). pp. 228-251. doi:10.1111/j.1467-8551.2012.00846.x

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Official URL: http://dx.doi.org/10.1111/j.1467-8551.2012.00846.x

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Abstract

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.

Item Type: Journal Article
Divisions: Faculty of Social Sciences > Warwick Business School > Strategy & International Business
Faculty of Social Sciences > Warwick Business School
Journal or Publication Title: British Journal of Management
Publisher: Wiley-Blackwell Publishing Ltd.
ISSN: 1045-3172
Official Date: 8 April 2014
Dates:
DateEvent
8 April 2014Published
8 October 2012Available
Volume: Volume 25
Number: Number 2
Page Range: pp. 228-251
DOI: 10.1111/j.1467-8551.2012.00846.x
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Restricted or Subscription Access

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