Get access

Agency Problems, Equity Ownership, and Corporate Diversification

Authors

  • DAVID J. DENIS,

  • DIANE K. DENIS,

  • ATULYA SARIN

    Search for more papers by this author
    • David J. Denis and Diane K. Denis are from Purdue University. Sarin is from Santa Clara University. We are grateful for helpful comments received from John Chalmers, John Graham, Henri Servaes, René Stulz, Sunil Wahal, Ralph Walkling, an anonymous referee, workshop participants at the University of Pittsburgh, Purdue University, Santa Clara University, the University of Utah, the University of Oregon, Harvard University, and Northeastern University and participants at the conference on Financial Economics and Accounting at the University of Maryland. Sarin acknowledges support from a Leavey Research Grant and from the Dean Witter Foundation.


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 outside blockholders. In addition, we report that 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 toward increased corporate focus is attributable to market disciplinary forces.

Get access to the full text of this article

Ancillary