Why Firms Diversify: Internalization vs. Agency Behavior

Posted: 24 Jun 1998

See all articles by Randall Morck

Randall Morck

University of Alberta - Department of Finance and Statistical Analysis; National Bureau of Economic Research (NBER); European Corporate Governence Institute; Asian Bureau of Finance and Economic Research

Bernard Yin Yeung

National University of Singapore - Business School

Date Written: March 25, 1998

Abstract

We present empirical evidence that cross-industry diversification, geographic diversification, and firm size add value in the presence of intangibles related to R&D or advertizing, but destroy value in their absence, presumably due to agency problems. This is consistent with synergy stemming from the internalization of markets for information-based assets. This supports Livermore (1935), who found a similar relationship between intangible assets, like R&D or advertising, and superior post-takeover firm performance in the U.S. "turn of the century" merger wave. We also find that the market for corporate control tends to make corrections in the appropriate direction. Firms that are large or diversified, but have few information-based assets, are unusually likely to become hostile takeover targets. In contrast, small undiversified firms with such assets are unusually likely to become targets in friendly mergers.

JEL Classification: G31, G32, L22

Suggested Citation

Morck, Randall K. and Yeung, Bernard Yin, Why Firms Diversify: Internalization vs. Agency Behavior (March 25, 1998). Available at SSRN: https://ssrn.com/abstract=100928

Randall K. Morck

University of Alberta - Department of Finance and Statistical Analysis ( email )

2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada
780-492-5683 (Phone)
780-492-3325 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

European Corporate Governence Institute ( email )

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Belgium

Asian Bureau of Finance and Economic Research ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Bernard Yin Yeung (Contact Author)

National University of Singapore - Business School ( email )

15 Kent Ridge Drive
BIZ 1 Level 6
Singapore, 119245
Singapore
65 6516 3075 (Phone)
65 6779 1365 (Fax)

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