The valuation effect of diversification is examined for large samples of fi
rms in Germany, Japan, and the United Kingdom for 1992 and 1994. We find no
significant diversification discount in Germany, but a significant diversi
fication discount of 10 percent in Japan and 15 percent in the U.K. Concent
rated ownership in the hands of insiders enhances the valuation effect of d
iversification in Germany, but not in Japan or the U.K. For Japan, only fir
ms with strong links to an industrial group have a diversification discount
. These findings suggest that international differences in corporate govern
ance affect the impact of diversification on shareholder wealth.