The Moderating Impact of Managerial Ability on the Relationship between Diversification and Firm Value, Investment Efficiency, and Information Asymmetry

This study explored the relationship between managerial ability and diversified firms in predicting firm value, investment efficiency and information asymmetry. The problem addressed in the study related to the value loss in diversified firms and the performance inefficiencies recorded within these firms compared to their stand-alone counterparts. The study conducted a non-experimental research design and quantitative correlation research method. Data was gathered from the Wharton Research Data Services (WRDS) library, which provides access to financial data through the COMPUSTAT (Computational Statistics) database. Using generalized linear model (GLM) regressions, the predictor (diversification), moderator (managerial ability), and the interaction term (diversification x managerial ability) were regressed onto the criterions (firm value, investment efficiency, information asymmetry). The examination of the role of managerial ability as a moderator revealed that managerial ability significantly moderated the negative relationship between diversification and firm value p <0 .001. Managerial ability also significantly moderated the negative relationship between diversification and investment efficiency p <0 .005. Contrary to the study's expectations, the managerial ability variable did not have an influence on the positive relationship between diversification and asymmetric information. By examining diversification in terms of firm value, investment efficiency and asymmetric information while moderating the effects of managerial ability, enhanced comprehension on the value and performance of diversified firms is attained. The study built upon established theory, suggesting that managerial ability can have a determinant role on enhancing firm value and investment efficiency within diversified structures. Findings of this study have also practical application to practitioners who expand into new business segments or run diversified firms and seek to improve valuation and investment efficiency matters.