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Agency Problems, Equity Ownership, and Corporate Diversification

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Author Info
 Denis, David J
Denis, Diane K
Sarin, Atulya
Abstract

The authors provide evidence on the agency cost explanation for corporate diversification. They find that the level of diversification is negatively related to managerial equity ownership and to the equity ownership of outside blockholders. In addition, the authors report that decreases in diversification are associated with external corporate control threats, financial distress, and management turnover. These findings suggest that agency problems are responsible for firms maintaining value-reducing diversification strategies and that the recent trend toward increased corporate focus is attributable to market disciplinary forces. Copyright 1997 by American Finance Association.

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Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 52 (1997)
Issue (Month): 1 (March)
Pages: 135-60
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Handle: RePEc:bla:jfinan:v:52:y:1997:i:1:p:135-60

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  3. Masaharu Hanazaki & Qun Liu, 2003. "The Asian Crisis and Corporate Governance －Ownership Structure, Debt Financing, and Corporate Diversification－," CEI Working Paper Series 2003-18, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  4. Mitchell Berlin, 1999. "Jack of all trades? Product diversification in nonfinancial firms," Business Review, Federal Reserve Bank of Philadelphia, issue May, pages 15-29. [Downloadable!]
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  6. Reid W. Click & Paul Harrison, 2000. "Does multinationality matter? Evidence of value destruction in U.S. multinational corporations," Finance and Economics Discussion Series 2000-21, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  10. Vaaler, Paul M. & Schrage, Burkhard N., 2007. "Residual State Factors, Policy Stability and Financial Performance Following Strategic Decisions by Privatizing Telecoms," Working Papers 07-0102, University of Illinois at Urbana-Champaign, College of Business. [Downloadable!]
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  14. Andrew Winton, 1999. "Don’t Put All Your Eggs in One Basket? Diversification and Specialization in Lending," Center for Financial Institutions Working Papers 00-16, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
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  17. Rajesh K. Aggarwal & Andrew A. Samwick, 1999. "Empire-Builders and Shirkers: Investment, Firm Performance, and Managerial Incentives," NBER Working Papers 7335, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  18. Vaaler, Paul M. & McNamara, Gerry, 2006. "Are Technology-Intensive Industries More Dynamically Competitive? No and Yes," Working Papers 06-0124, University of Illinois at Urbana-Champaign, College of Business. [Downloadable!]
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