Abstract
I find that diversified firms in New Zealand are valued at a discount of 18.8% to 41.7% compared with their focused counterparts. The results also show that these firms tend to be valued less negatively during crisis times than normal times. Furthermore, I find evidence to support the argument that the observed discount is partly caused by the presence of higher agency issues in the diversified firms. When adding several governance variables as explanatory variables, I report a proportional decrease between 14.9% and 21.3% in the previously reported diversification discount. This suggests that the observed diversification discount is partly caused by poor corporate governance. The results further suggest that out of the five board structure variables covered by my study, the size of the board, its busyness and whether or not the compensation of directors includes equity-based compensation are major contributors to the reported discount. Although the association between diversification effect and governance practices becomes weaker, the conclusions generally hold after controlling for endogeneity using two-way fixed-effects and dynamic-panel generalized method of moments (GMM) models.