We examine the valuation effects of diversification activities for Korean firms by diversification type,
chaebol affiliation, and the occasion of the Korean financial crisis. Employing data of 2,894 firm-years
during the 1994-2000 period, we find that diversification activities by Korean firms are associated with a
decline in firm value over the entire period examined, though the effect of diversification on firm value is
sensitive to the way firm value is measured. Of particular interest are our findings on the significantly
different effects of related versus unrelated diversification on firm value. Specifically, unrelated
diversification by Korean firms decreases firm value, whereas related diversification has a non-negative,
though not positive, effect on firm value, regardless of how the firm value is measured. Our results
further show an important role of the Korean financial crisis on the diversification activities by chaebolaffiliated
firms. Related diversification by chaebol-affiliated firms is associated with an increase in firm
value before the financial crisis, but has a significant negative impact on firm value during the post-crisis
period. These results indicate that once-dominant chaebol-affiliated firms find it difficult to generate
gains from related diversification following the Korean financial crisis.
JEL Classification: G34, G31
Keywords: corporate diversification, related and unrelated diversification, firm value, Korean firms,
chaebol
