THE PAKISTAN DEVELOPMENT REVIEW
Investigating the Group Diversification Premium and Discount in Pakistan
The study analyses the group diversification-performance relationships in an emerging market context. The study employs a relatively large, contemporary and time varying database of Pakistani listed firms covering a period of 1993–2012. Based on “Chop Shop” methodology, the study finds the presence of group diversification discount in Pakistan. Group diversification-performance relationship is strongly negative and group diversification seems harmful for firm value consistent with the market failure theory and agency theory. Further, the study also finds an evidence of non-linear group diversification-performance relationship and it is explicitly negative-positive-negative. Moreover, the results of sub-period samples demonstrate an ever present group diversification discount in each sub-period. The ultimate controllers in diversified business groups are engaged in more diversification activities in order to bring assets worth more under the group control with least capital investment for the maximisation of their own wealth instead of keeping the profits potential of these investments. Group diversification seems a root cause of agency conflicts among the ultimate controlling shareholders and minority shareholders in the group affiliated firms and thus detrimental for firm value.
WASEEM ULLAH and ARSHAD HASAN