IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/1280.html
   My bibliography  Save this paper

Incentives for Diversification and the Structure of the Conglomerate Firm

Author

Listed:
  • William J. Marshall
  • Jess B. Yawitz
  • Edward Greenberg

Abstract

In this paper, we examine the proposition that both the structures of conglomerate firms and their merger activities evidence a systematic attempt to diversify income sources and reduce the volatility of firms' profits. We test whether firms that are active in one line of business are more likely to be involved in another, the lower is the correlation between returns to the two activities, and whether, ceteris paribus, the likelihood of merger depends inversely on the correlation of cash flows to the principal activities of thecandidates for merger. We conclude that firms do act as if their goals include firm-level diversification.

Suggested Citation

  • 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.
  • Handle: RePEc:nbr:nberwo:1280
    Note: ME
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w1280.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Alchian, Armen A & Demsetz, Harold, 1972. "Production , Information Costs, and Economic Organization," American Economic Review, American Economic Association, vol. 62(5), pages 777-795, December.
    2. Galai, Dan & Masulis, Ronald W., 1976. "The option pricing model and the risk factor of stock," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 53-81.
    3. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    4. Maloney, Michael T & McCormick, Robert E, 1983. "A Theory of Cost and Intermittent Production," The Journal of Business, University of Chicago Press, vol. 56(2), pages 139-153, April.
    5. Grabowski, Henry G & Mueller, Dennis C, 1972. "Managerial and Stockholder Welfare Models of Firm Expenditures," The Review of Economics and Statistics, MIT Press, vol. 54(1), pages 9-24, February.
    6. Ross, Stephen A, 1973. "The Economic Theory of Agency: The Principal's Problem," American Economic Review, American Economic Association, vol. 63(2), pages 134-139, May.
    7. 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.
    8. Heckerman, Donald G., 1975. "Motivating managers to make investment decisions," Journal of Financial Economics, Elsevier, vol. 2(3), pages 273-292, September.
    9. J. E. Stiglitz, 1972. "On the Optimality of the Stock Market Allocation of Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 86(1), pages 25-60.
    10. Eugene F. Fama, 1972. "Perfect Competition and Optimal Production Decisions under Uncertainty," Bell Journal of Economics, The RAND Corporation, vol. 3(2), pages 509-530, Autumn.
    11. Lemelin, Andre, 1982. "Relatedness in the Patterns of Interindustry Diversification," The Review of Economics and Statistics, MIT Press, vol. 64(4), pages 646-657, November.
    12. Ross, Stephen A, 1978. "The Current Status of the Capital Asset Pricing Model (CAPM)," Journal of Finance, American Finance Association, vol. 33(3), pages 885-901, June.
    13. Baron, David P, 1979. "Investment Policy, Optimality, and the Mean-Variance Model: Review Article," Journal of Finance, American Finance Association, vol. 34(1), pages 207-232, March.
    14. Michael C. Jensen & John B. Long Jr., 1972. "Corporate Investment under Uncertainty and Pareto Optimality in the Capital Markets," Bell Journal of Economics, The RAND Corporation, vol. 3(1), pages 151-174, Spring.
    15. Greenberg, Edward & Marshall, William J & Yawitz, Jess B, 1978. "The Technology of Risk and Return," American Economic Review, American Economic Association, vol. 68(3), pages 241-251, June.
    16. Harris, Milton & Raviv, Artur, 1979. "Optimal incentive contracts with imperfect information," Journal of Economic Theory, Elsevier, vol. 20(2), pages 231-259, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Benjamin E. Hermalin and Michael L. Katz., 1994. "Corporate Diversification and Agency," Economics Working Papers 94-227, University of California at Berkeley.
    2. Mantell, Edmund H., 1998. "The effect on firm output after its acquisition by a pure conglomerate," Journal of Economic Behavior & Organization, Elsevier, vol. 36(4), pages 487-501, September.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:1280. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: () or (Joanne Lustig). General contact details of provider: http://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.