The Impact of Corporate Governance on the Financial Outcomes of Global Diversification

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Abstract Agency theory tenets imply that 1) managers may pursue investment strategies that are at odds with shareholder value and 2) effective governance mechanisms can improve the quality of managerial decision-making and enhance the outcomes of corporate investment. Accordingly, using an agency theory lens, we hypothesize that the economic consequences of global diversification are contingent upon the quality of the multinational firm’s corporate governance and that high (poor) quality corporate governance is associated with positive (negative) economic consequences from global diversification. Using a sample of 5,985 firm-year observations over the period 2002 through 2006, we find support for our hypothesis.

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