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Corporate Diversification and Agency

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  • Benjamin E. Hermalin

    (University of California at Berkeley)

  • Michael L. Katz

    (University of California at Berkeley)

Abstract

By a well-known argument, securities holders do not directly benefit from risk-reducing corporate diversification when they can replicate this difersification on their own. Some have argued that corporate diversification may be of value, or can otherwise be explained by, the agency relationship between securities holders and managers. We argue that the value of diversification in an agency relationship derives not from its effects on risk, but rather from its effects on the principal's information about the agent's actions.

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File URL: http://128.118.178.162/eps/io/papers/9402/9402001.ps.gz
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Bibliographic Info

Paper provided by EconWPA in its series Industrial Organization with number 9402001.

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Date of creation: 24 Feb 1994
Date of revision: 15 Nov 1996
Handle: RePEc:wpa:wuwpio:9402001

Note: 177,985 bytes postscript file, compressed; keywords: diversification, principal-agent relationship
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Web page: http://128.118.178.162

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Keywords: Agency; Corporate Diversification;

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References

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  1. Smith, Clifford W. & Stulz, René M., 1985. "The Determinants of Firms' Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(04), pages 391-405, December.
  2. Sanford Grossman & Oliver Hart, . "An Analysis of the Principal-Agent Problem," Rodney L. White Center for Financial Research Working Papers 15-80, Wharton School Rodney L. White Center for Financial Research.
  3. Hermalin, Benjamin E & Katz, Michael L, 1991. "Moral Hazard and Verifiability: The Effects of Renegotiation in Agency," Econometrica, Econometric Society, vol. 59(6), pages 1735-53, November.
  4. Morck, Randall & Shleifer, Andrei & Vishny, Robert W, 1990. " Do Managerial Objectives Drive Bad Acquisitions?," Journal of Finance, American Finance Association, vol. 45(1), pages 31-48, March.
  5. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
  6. Levy, Haim & Sarnat, Marshall, 1970. "Diversification, Portfolio Analysis and the Uneasy Case for Conglomerate Mergers," Journal of Finance, American Finance Association, vol. 25(4), pages 795-802, September.
  7. Benjamin Hermalin., 1991. "Managerial Preferences Concerning Risky Projects," Economics Working Papers 91-168, University of California at Berkeley.
  8. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  9. Debra J. Aron, 1988. "Ability, Moral Hazard, Firm Size, and Diversification," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 72-87, Spring.
  10. Kim, Son Ku, 1995. "Efficiency of an Information System in an Agency Model," Econometrica, Econometric Society, vol. 63(1), pages 89-102, January.
  11. Yakov Amihud & Baruch Lev, 1981. "Risk Reduction as a Managerial Motive for Conglomerate Mergers," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 605-617, Autumn.
  12. Diamond, Douglas W & Verrecchia, Robert E, 1982. " Optimal Managerial Contracts and Equilibrium Security Prices," Journal of Finance, American Finance Association, vol. 37(2), pages 275-87, May.
  13. DeMarzo, Peter M & Duffie, Darrell, 1995. "Corporate Incentives for Hedging and Hedge Accounting," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 743-71.
  14. Lewellen, Wilbur G, 1971. "A Pure Financial Rationale for the Conglomerate Merger," Journal of Finance, American Finance Association, vol. 26(2), pages 521-37, May.
  15. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
  16. Steven Shavell, 1979. "Risk Sharing and Incentives in the Principal and Agent Relationship," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 55-73, Spring.
  17. Lewellen, Wilbur & Loderer, Claudio & Rosenfeld, Ahron, 1989. "Mergers, Executive Risk Reduction, and Stockholder Wealth," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(04), pages 459-472, December.
  18. Harris, Milton & Raviv, Artur, 1990. " Capital Structure and the Informational Role of Debt," Journal of Finance, American Finance Association, vol. 45(2), pages 321-49, June.
  19. William J. Marshall & Jess B. Yawitz & Edward Greenberg, 1984. "Incentives for Diversification and the Structure of the Conglomerate Firm," NBER Working Papers 1280, National Bureau of Economic Research, Inc.
  20. Errunza, Vihang R & Senbet, Lemma W, 1984. " International Corporate Diversification, Market Valuation, and Size-Adjusted Evidence," Journal of Finance, American Finance Association, vol. 39(3), pages 727-43, July.
  21. James A. Mirrlees, 1976. "The Optimal Structure of Incentives and Authority Within an Organization," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 105-131, Spring.
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Citations

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Cited by:
  1. Felipe Balmaceda, 2002. "Corporate Diversification: Good for Some Bad for Others," Documentos de Trabajo 141, Centro de Economía Aplicada, Universidad de Chile.
  2. Andriosopoulos, Dimitris & Andriosopoulos, Kostas & Hoque, Hafiz, 2013. "Information disclosure, CEO overconfidence, and share buyback completion rates," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5486-5499.
  3. Perotti, Enrico C & von Thadden, Ernst-Ludwig, 2003. "The Political Economy of Bank and Equity Dominance," CEPR Discussion Papers 3914, C.E.P.R. Discussion Papers.
  4. Nancy L. Rose & Andrea Shepard, 1994. "Firm Diversification and CEO Compensation: Managerial Ability or Executive Entrenchment?," NBER Working Papers 4723, National Bureau of Economic Research, Inc.
  5. Enrico Perotti & Ernst-Ludwig von Thadden, 2002. "The Political Economy of Bank- and Market Dominance," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 02.14, Université de Lausanne, Faculté des HEC, DEEP, revised Apr 2003.
  6. Claessens, Stijn & Djankov, Simeon & Joseph P. H. Fan & Lang, Larry H. P., 1999. "Corporate diversification in East Asia : the role of ultimate ownership and group affiliation," Policy Research Working Paper Series 2089, The World Bank.

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