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FROM DIVERSIFICATION PREMIUM TO DIVERSIFICATION DISCOUNT DURING INSTITUTIONAL TRANSITIONS

Lee, Keonbeom and Peng, Mike and Lee, Keun (2005): FROM DIVERSIFICATION PREMIUM TO DIVERSIFICATION DISCOUNT DURING INSTITUTIONAL TRANSITIONS. Published in: Journal of World Business , Vol. 43, No. 1 (2005): pp. 40-63.

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Abstract

Recent development of an institution-based theory of corporate diversification has uncovered a diversification premium in emerging economies, suggesting that some business group-affiliated companies may outperform competing firms not affiliated with business groups. Is the diversification premium found in emerging economies likely to hold over time? This article extends the institution-based theory by arguing that as institutional transitions unfold, diversification premium in emerging economies is likely to dissipate over time and eventually become a diversification discount. We empirically draw on a data set from South Korea during 1984-96 involving 84 business groups and 751 group-affiliated and independent firms to substantiate this claim via a “chop shop” method. To the best of our knowledge, this represents the first study that documents the longitudinal process of how a diversification premium becomes a diversification discount during institutional transitions.

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