Internal capital market efficiency and the diversification discount: The role of financial statement comparability

Jia‐Chi Cheng · Ruei‐Shian Wu

38 citations0/0 files storedJournal of Business Finance &amp Accounting

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Auditing, Earnings Management, Governance Corporate Finance and Governance Financial Reporting and Valuation Research

Abstract

Abstract This paper investigates how financial statement comparability affects the efficiency of internal capital markets and diversification discounts in multi‐segment firms through monitoring mechanisms. Previous studies suggest that financial statement comparability improves transparency and reduces the cost of information processing, mitigating information asymmetry between managers and shareholders. Using measures of comparability and internal capital efficiency, we find that financial statement comparability has a strong positive influence on internal capital market efficiency. Further, we find that by improving the efficiency of internal capital markets, financial statement comparability indeed mitigates diversification discounts. Especially, the effect of financial statement comparability is more pronounced for firms with high information asymmetry or operating environment volatility. The results support our arguments that financial statement comparability enhances the efficiency of internal capital markets and increases firm value in diversified firms by mitigating agency problems via monitoring and corporate control mechanisms.

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References

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