Corporate governance and firm diversification

We empirically investigate whether corporate governance structure is differ ent between focused and diversified firms, and whether any differences in c orporate governance are associated with the value loss from diversification . We find that, relative to focused firms, CEOs in diversified firms ha ve lower stock ownership and lower pay-for-performance sensitivities. Diversif ied companies, however, have more outside directors, no difference in indep endent block-holdings, and sensitivity of CEO turnover to performance simil ar to that in single-segment firms. Moreover, ive find no compelling eviden ce that internal governance failures are associated with the decision to di versity or that governance characteristics explain the value loss from dive rsification. Our findings suggest that diversified firms use alternative go vernance mechanisms as substitutes for low pay-for-performance sensitivitie s and CEO ownership. We conclude that agency costs do not provide a complet e explanation for the magnitude and persistence of the diversification disc ount.