Types of Diversification, Group Affiliation, and Firm Value: The Case of Korean Chaebols

We investigate the valuation effects of diversification activities by Korean business groups known as chaebols. Existing studies show indeterminate evidence on the effects of diversification by group-affiliated firms, relative to independent firms, on firm value. Using logit regressions for an extensive dataset of Korean firms, we derive reconciling evidence that while unrelated diversification by chaebol firms generally undermines firm value, their related diversification conditionally generates a significant value gain. After the Asian financial crisis, however, even related diversification the by chaebol - affiliated firms is found to destroy firm value. Further, we also find that chaebol firms are more likely to engage in active diversification - both related and unrelated. Our results show also that chaebol firms are less valuable than independent firms as estimated by Tobin’s q, indicating a value discount associated with group affiliation. Our findings shed light to the economic implication of diversification especially by the group - affiliated firms.