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Contrary to prior research indicating that on average, shareholders do not benefit from corporate diversification, we provide evidence of a significant positive relation between diversification and abnormal buy-and-hold returns. Additionally, we show that shareholder gain from corporate diversification is a function of managerial accountability. We introduce and test the effective monitoring hypothesis for diversified firms, and demonstrate that the positive relation between diversification and abnormal returns is concentrated in firms where managers are most likely to be held accountable for policies that reduce shareholder value. The main implication is that gains from corporate diversification are concentrated in firms in which managerial accountability deters managers from taking advantage of asymmetric information created by diversification.

When does diversification add value: evidence of corporate governance and abnormal long-term stock performance