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Corporate Diversification and Agency

Author

Listed:
  • 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.

Suggested Citation

  • Benjamin E. Hermalin & Michael L. Katz, 1994. "Corporate Diversification and Agency," Industrial Organization 9402001, University Library of Munich, Germany, revised 15 Nov 1996.
    • Handle: RePEc:wpa:wuwpio:9402001
    Note: 177,985 bytes postscript file, compressed; keywords: diversification, principal-agent relationship
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    References listed on IDEAS

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    Cited by:

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    2. 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.
    3. Kim, Soohyung, 2023. "Dual-class share structure and firm risks," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    4. Rosellon Cifuentes, M.A., 1999. "Essays on financial policy, liquidation values and product markets," Other publications TiSEM 802f644e-3e93-4815-bf33-8, Tilburg University, School of Economics and Management.
    5. Felipe Balmaceda, 2002. "Corporate Diversification: Good for Some Bad for Others," Documentos de Trabajo 141, Centro de Economía Aplicada, Universidad de Chile.
    6. Danso, Albert & Lartey, Theophilus & Amankwah-Amoah, Joseph & Adomako, Samuel & Lu, Qinye & Uddin, Moshfique, 2019. "Market sentiment and firm investment decision-making," International Review of Financial Analysis, Elsevier, vol. 66(C).
    7. Nancy L. Rose & Andrea Shepard, 1997. "Firm Diversification and CEO Compensation: Managerial Ability or Executive Entrenchment?," RAND Journal of Economics, The RAND Corporation, vol. 28(3), pages 489-514, Autumn.
    8. 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.
    9. Rizzo, Emanuele, 2018. "Essays on corporate governance and the impact of regulation on financial markets," Other publications TiSEM b5158260-ea13-4763-b992-6, Tilburg University, School of Economics and Management.

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    More about this item

    Keywords

    Agency; Corporate Diversification;

    JEL classification:

    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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