Agency Problems, Equity Ownership, and Corporate Diversification

Abstract

We provide evidence on the agency cost explanation for corporate diversification. We find that the level of diversification is negatively related to managerial equity ownership and to the equity ownership of outsideblockholders. In addition, we report decreases in diversification are associated with external corporate control threats, financial distress, and management turnover. These findings suggest that agency problems are responsible for firms maintaining value-reducing diversification strategies and that the recent trend towards increased corporate focus is attributable to market disciplinary forces.

JEL Classification: G39