An Agency Perspective on Firm Diversification, Efficiency and Performance: Evidence From Malaysia

Sin-Huei Ng,Tze San Ong,Boon Heng Teh

doi:10.5430/ijfr.v10n6p24

Sin-Huei Ng, Tze San Ong + Show 1 more

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https://doi.org/10.5430/ijfr.v10n6p24

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Abstract

I examine, from the agency perspective, the relationship between three important corporate measures among the Malaysian publicly-listed family-controlled firms: firm diversification, asset utilization efficiency and firm performance. I also explore the role of board independence in moderating the firm diversification-performance relationship. My findings suggest that the greater the extent of firm diversification, the poorer will the asset utilization efficiency be. The poorer efficiency is likely to have caused the equally poorer performance for the firms in my findings. Notably, firm diversification is found to be more detrimental to performance for those firms affiliated to business group compared to firms without group affiliation. The group-affiliated firms which are found to be more diversified than the non-group firms, could have engaged in greater diversification for the self-interest of the controlling family. Specifically, I find that the agency-driven diversification causes the ROA (Tobin’s Q) of the firms to be lowered by 0.354% (0.026) for every additional increase in the number of business segments as the measure of firm diversification. In terms of the moderating effect of board independence, my finding shows that audit committee of board comprises entirely of independent outside directors positively moderate the firm diversification-performance linkage and is capable of reversing the apparently negative linkage between the two.

Highlights

Firms may be more inclined to reduce their risk exposure in the business because usually a significant proportion of the wealth of the owners is tied to their business (García-Kuhnert, 2015; Jiang et al, 2015)
Our findings surrounding firm diversification show that in general, diversification is not beneficial for the minority shareholders of family-controlled firms in Malaysia as increases in firm diversification are associated with deteriorating firm return and performance
The finding is in line with the explanation by Singh et al (2007) that the probability of agency-driven and value-destroying diversification is greater in situations where the market for corporate control is inactive and where the corporate sector is dominated by family-controlled business groups and concentrated family ownership

Summary

Introduction

Firms may be more inclined to reduce their risk exposure in the business because usually a significant proportion of the wealth of the owners is tied to their business (García-Kuhnert, 2015; Jiang et al, 2015) One such strategy to reduce risk is to diversify into various business lines. Mitton (2002) documented that loss in firm value could be pronounced for firms with high diversification during periods of economic or financial crisis. This implies that expropriation of minority shareholders increases in diversified firms during periods of crisis (Mitton, 2002). Expropriation is a defined by Claessens et al (2000) as the process of using one's control powers to maximize own welfare and redistribute wealth from others

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