Using data for more than 2,000 companies from nine East Asian economies, the authors examine the interactions between ultimate ownership, group affiliation, and corporate diversification. They find evidence that allocation resources within business groups is associated with higher market valuation when external markets are less developed. They also find that group affiliation and firm-level diversification are used complementarily to exploit the relative cost-effectiveness of internal markets. They reject the hypothesis that diversification patterns can be explained by large blockholders ' incentive to reduce risk. But they find support for the hypothesis that controlling owners use diversification to expropriate other shareholders. Group affiliation is widespread among publicly traded corporations in East Asia. Group-affiliated firms are on average associated with diversification discounts. Further analysis reveals that the discounts are attributable to diversified firms in the more developed East Asian economies. By contrast, group affiliation positively contributes to diversification performance in less developed economies. The authors find that group-affiliated firms are more likely to diversify in developing economies but are equally likely to diversify in developed economies. When diversifying in more developed economies, group-affiliated firms destroy more value than do independent firms. In developing economies, group-affiliated firms are more likely than independent firms to benefit from diversification in developing economies.
