Corporate Governance and the Diversification Discount: The Implications of the Sarbanes-Oxley Act

31 Pages Posted: 25 Sep 2011 Last revised: 9 Jan 2012

See all articles by Anwar S. Boumosleh

Anwar S. Boumosleh

Lebanese American University

Brandon N. Cline

Mississippi State University

Fawzi Jaber Hyder

Lebanese American University

Adam S. Yore

University of Missouri at Columbia - Department of Finance

Date Written: September 19, 2011

Abstract

We examine whether the Sarbanes-Oxley Act has a major role in reducing the diversification discount and enhancing internal capital markets efficiency. The act proposes new rules and regulations on financial practice and reshapes corporate governance to insure alignment of incentives between corporate insiders and investors. We check the relationship between corporate governance variables and the diversification discount. Finally, we conclude the indirect effects of the act in enhancing efficiency and reducing the diversification discount. We find that the level of corporate governance, especially CEO power, affects the efficient allocation of resources and the diversification discount correspondingly. However, we find that the sensitivity of the diversification discount to CEO power decreases significantly after the implementation of the Sarbanes-Oxley Act, which implies that the restrictions and regulations passed by the act enhance corporate governance and limit the misallocation of resources and the diversification discount respectively.

Keywords: Diversification Discount, Internal Capital Market, Corporate Governance, Sarbanes-Oxley

JEL Classification: G34, L25, K22

Suggested Citation

Boumosleh, Anwar S. and Cline, Brandon N. and Jaber Hyder, Fawzi and Yore, Adam S., Corporate Governance and the Diversification Discount: The Implications of the Sarbanes-Oxley Act (September 19, 2011). Midwest Finance Association 2012 Annual Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1933105 or http://dx.doi.org/10.2139/ssrn.1933105

Anwar S. Boumosleh

Lebanese American University ( email )

P.O. Box 13-5053
Beirut
Lebanon
+961-1-786456 (Phone)

Brandon N. Cline

Mississippi State University ( email )

Mississippi State, MS 39762
United States
662.325.7477 (Phone)
662.325.1977 (Fax)

Fawzi Jaber Hyder (Contact Author)

Lebanese American University ( email )

P.O.Box 36
Chouran-Beirut 1102 2801
Beirut
Lebanon
9613063676 (Phone)

Adam S. Yore

University of Missouri at Columbia - Department of Finance ( email )

403 Cornell Hall
Columbia, MO 65211
United States
573-884-1446 (Phone)

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