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Controlling shareholders and the effect of diversification on firm value: evidence from Indonesian listed firms

Rayenda Khresna Brahmana (Universiti Malaysia Sarawak, Kota Samarahan, Malaysia)
Doddy Setiawan (Universitas Sebelas Maret, Surakarta, Indonesia)
Chee Wooi Hooy (Universiti Sains Malaysia, Minden, Malaysia)

Journal of Asia Business Studies

ISSN: 1558-7894

Article publication date: 8 July 2019




The purpose of this paper is to investigate whether the presence of controlling shareholder affects the value of diversification based on Indonesian listed firms. It further examines whether the degree of controlling ownership and the types of controlling ownership matter.


Panel data were used over the period 2006-2010 with dynamic generalised method-of-moments estimations and it defined diversification as industrial diversification, international diversification or diversification in both. A few different thresholds for the control rights of the largest shareholder are also set.


The results show that industrial diversification improves firm value but international diversification does not, while diversified in both strategies discounted firm value. The presence of a controlling shareholder is found to have a significant diversification discount, and the effect is nonlinear, where the entrenchment effect occurs around 20 to60 per cent threshold of controlling across all types of diversified firms. Last, foreign firms are found to enjoy more value from industrial diversification, but it takes an adverse turn when these involve both diversification strategies. Government firms do not seem to be different from family firms.

Research limitations/implications

The study shows the need to differentiate diversification strategies and account for non-linearity and ownership identity in modelling diversification value. Also, the degree of shareholders’ control can be a significant channel to address the agency issue on diversification value.

Practical implications

Under the backdrop of unique Indonesian corporate ownership, the presence of controlling owners is shown, and their ownership affects the value of diversification. The entrenchment effect however appears only at a certain range of ownership. This is a crucial guide for the shareholders to ensure an appropriate monitoring system is installed to maximize the shareholder’s value, especially in family firms.


The value of this paper is twofold. At first, the first empirical evidence on the diversification debate with Indonesian firms for its unique institutional setting is presented. Second, the standard modelling framework to investigate the types of ownership on diversification value is extended, which has rarely been covered in previous investigations.



Brahmana, R.K., Setiawan, D. and Hooy, C.W. (2019), "Controlling shareholders and the effect of diversification on firm value: evidence from Indonesian listed firms", Journal of Asia Business Studies, Vol. 13 No. 3, pp. 362-383.



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