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Corporate diversification, information asymmetry and insider trading
journal contributionposted on 2014-09-23, 09:35 authored by Ali Ataullah, Ian R. Davidson, Hang Le, 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. © 2012 British Academy of Management.
- Business and Economics
Published inBritish Journal of Management
Pages228 - 251
CitationATAULLAH, A. ... et al, 2014. Corporate diversification, information asymmetry and insider trading. British Journal of Management, 25 (2), pp.228-251.
Publisher© The Author(s) / British Journal of Management © British Academy of Management
- NA (Not Applicable or Unknown)
Publisher statementThis work is made available according to the conditions of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International (CC BY-NC-ND 4.0) licence. Full details of this licence are available at: https://creativecommons.org/licenses/by-nc-nd/4.0/
NotesThis paper is closed access.