Why Do Managers Diversify Their Firms? Agency Reconsidered

Posted: 6 Sep 2003

See all articles by Rajesh K. Aggarwal

Rajesh K. Aggarwal

Northeastern University

Andrew A. Samwick

Dartmouth College - Department of Economics; National Bureau of Economic Research (NBER)

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Abstract

We develop a contracting model between shareholders and managers in which managers diversify their firms for two reasons: to reduce idiosyncratic risk and to capture private benefits. We test the comparative static predictions of our model. In contrast to previous work, we find that diversification is positively related to managerial incentives. Further, the link between firm performance and managerial incentives is weaker for firms that experience changes in diversification than it is for firms that do not. Our findings suggest that managers diversify their firms in response to changes in private benefits rather than to reduce their exposure to risk.

Suggested Citation

Aggarwal, Rajesh K. and Samwick, Andrew A., Why Do Managers Diversify Their Firms? Agency Reconsidered. Journal of Finance, Vol. 58, pp. 71-118, 2003. Available at SSRN: https://ssrn.com/abstract=377109

Rajesh K. Aggarwal (Contact Author)

Northeastern University ( email )

413 Hayden Hall
360 Huntington Avenue
Boston, MA 02115
United States

Andrew A. Samwick

Dartmouth College - Department of Economics ( email )

Hanover, NH 03755
United States
603-646-2893 (Phone)
603-646-2122 (Fax)

HOME PAGE: http://www.dartmouth.edu/~samwick

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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