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Corporate Diversification and Agency

  • Benjamin E. Hermalin and Michael L. Katz.

By a well-known argument, securities holders do not directly benefit from risk-reducing corporate diversification when they can replicate this diversification 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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Paper provided by University of California at Berkeley in its series Economics Working Papers with number 94-227.

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Date of creation: 01 Feb 1994
Date of revision:
Handle: RePEc:ucb:calbwp:94-227
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  1. 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.
  2. Kim, Son Ku, 1995. "Efficiency of an Information System in an Agency Model," Econometrica, Econometric Society, vol. 63(1), pages 89-102, January.
  3. Sanford J Grossman & Oliver D Hart, 2001. "An Analysis of the Principal-Agent Problem," Levine's Working Paper Archive 391749000000000339, David K. Levine.
  4. Hermalin, Benjamin E, 1993. "Managerial Preferences Concerning Risky Projects," Journal of Law, Economics and Organization, Oxford University Press, vol. 9(1), pages 127-35, April.
  5. 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.
  6. 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.
  7. 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.
  8. Benjamin E. Hermalin and Michael L. Katz., 1990. "Moral Hazard and Verifiability: The Effects of Renegotiation in Agency," Economics Working Papers 90-141, University of California at Berkeley.
  9. 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.
  10. 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.
  11. 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.
  12. Bengt Holmstrom, 1997. "Moral Hazard and Observability," Levine's Working Paper Archive 1205, David K. Levine.
  13. 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.
  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. 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.
  16. 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.
  17. 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.
  18. 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.
  19. 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.
  20. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
  21. 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.
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