Abstract

This study investigates the impact of firm's ownership structure on the extent of firm diversification and the performance attributable to diversification. We document that firm's degree of international diversification (product diversification) is positively (negatively) related to the controlling shareholders’ cash flow rights, and negatively (positively) related to the divergence between cash flow rights and control rights of the controlling shareholders. Our empirical findings are consistent with the conjecture that the controlling shareholders of Taiwan's listed firms use product diversification to extract private benefits at the expense of minority shareholders, while international diversification is driven by the controlling shareholders' desire to enhance shareholder value. Furthermore, we find that the controlling shareholders' cash flow rights (the cash-vote divergence of the controlling shareholders) positively (negatively) moderate the impact of both product diversification and international diversification on firm performance. Our findings highlight the importance of distinguishing the motivation of different diversification strategies, and support firm's ownership structure as an explanation for the performance of diversified firms.