Proceedings of 9th Asia-Pacific Business Research Conference
5 - 6 November 2015, Bayview Hotel, Singapore, ISBN: 978-1-922069-87-0
Diversification, Cash Holdings and Corporate Governance:
Evidence from Japan
Christina Atanasova and Jess Diamond
This paper uses data for over 3,000 Japanese firms for the period 1999 - 2014 to
examine the net costs and benefits of corporate diversification. Previous studies have
documented a significant negative effect for Japan, i.e. a diversification discount, but we
show that there is large variation with many diversified firms actually trading at a premium
relative to a theoretical portfolio of single segment firms. We find that for firms with strong
corporate governance, firm values are high since lower cross-divisional correlations in
investment opportunities allow diversified firms to hold less cash even after controlling for
cash flow volatility. Only when corporate governance is weak, firm values are low
consistent with capital misallocation where funds are transferred from high-to lowproductivity divisions.
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Christina Atanasova, Simon Fraser University, Canada and Jess Diamond, Hitotsubashi University, Japan.