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Corporate Governance and Firm Diversification
Financial Management (Financial Management Association), Spring, 2000 by Ronald C. Anderson, Thomas W. Bates, John M. Bizjak, Michael L. Lemmon
D. Measures of Firm Diversification
FASB No. 14 and SEC Regulation S-K require firms to report segment information for fiscal years ending after December 15, 1977. We use data from the Compustat Industry Segment (CIS) database from 1985 through 1995 to compute our measures of firm diversification. The CIS database reports the number of different business segments, up to a maximum of 10, as defined by the firm under FASB No. 14. Our primary measure of diversification is a dummy variable equal to one if the firm operates in multiple lines of business. [5] Comment and Jarrell (1995), Berger and Ofek (1995), Rose and Shepard (1997), and Denis, Denis, and Sarin (1997) also use the same measure of diversification.
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E. Excess Value Measure
Revenue based excess value is calculated for each firm year using the methodology of Berger and Ofek (1995). Excluding observations with incomplete data, we are left with 1,748 firm-year observations of excess value.
F. Control Variables
We introduce several control variables into our regression analysis to account for CEO and firm characteristics. We gather information on the age and tenure of the CEO from proxy statements. Firm-specific control variables are calculated with data drawn from the CRSP and Compustat Industrial Files. Firm size is measured as the natural log of the book value of total assets. Regulated firms are identified by a dummy variable that equals one if the firm is a regulated utility (SIC 4911-4932). Leverage is defined as the book value of long-term debt divided by total assets. Growth opportunities are proxied by the ratio of R&D expenditures to total assets. The return on assets is computed as income before extraordinary items, divided by total assets. The market return is the annual total return on the firm's stock, and firm risk is proxied by the standard deviation of weekly stock returns obtained from the CRSP tapes.
G. Summary Statistics
Table I presents descriptive statistics for our sample of firms. Mean (median) CEO and officer/director ownership is 5.9% (0.8%) and 11.8% (5.6%), respectively. Outside blockholders hold 7.6% (0%). Board size is 10.6 (10.0) with outside and inside board members holding 43% (42%), and 35% (33%) of the seats, respectively. The average CEO in our sample is 58.4 (58) years old, and has held the position for 11.7 (8.0) years. Salary plus bonus plus the value of the total option portfolio for the CEO are $796,000 ($624,000) and $3,366,000 ($646,000), respectively. Equity-based pay constitutes 46.7% (54.3%) of total compensation.
Firms report an average (median) of 2.31 (2.0) different business segments. Approximately 63% of our observations are of firms identifying business operations in more than one segment. With respect to our control variables, the average firm size is $1.87 billion ($1.85 billion), and the average ratio of R&D to total assets is 2% (0%). The average debt to asset ratio is 19% (18%), and the percentage of sample firms from regulated industries is 12%.
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