Corporate Diversification and Agency

Benjamin E. Hermalin and Michael L. Katz.
Authors registered in the RePEc Author Service: Benjamin Hermalin and Michael L. Katz (mlkatz@berkeley.edu)

No E00-272, Economics Working Papers from University of California at Berkeley

Abstract: Benjamin E. Hermalin and Michael L. Katz Keywords: diversification; principal-agent relationship Firms undertake a variety of actions to reduce risk through diversification, including entering diverse lines of business, taking on project partners, and maintaining portfolios of risky projects such as R&D or natural resource exploration. By a well-known argument, securities holders do not directly benefit from risk-reducing corporate diversification when they can replicate this diversification on their own. Moreover, shareholders should be risk neutral with respect to the unsystematic risk that is associated with many research projects. Some have argued that corporate risk reduction 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 strategies 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. We demonstrate by example that diversification activities may increase or decrease the principal's information, depending on the particular structure of the activity. January 2000

Date: 2000-01-01
New Economics Papers: this item is included in nep-fin and nep-ind
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Corporate Diversification and Agency (2000)
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