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Abstract
Managerial theories of conglomerate mergers suggest that such mergers are motivated by the manager's desire to reduce his firm's—and thus his income—risk. Yet, the application of optimal contracting models [e.g., Diamond and Verrecchia (1982)] to this issue suggests that the stockholders, who bear the cost of uncertainty, may also benefit from reducing the firm's risk. Examining the market reaction to congomerate mergers announcements, we cannot support the hypothesis that managers initiate conglomerate mergers solely for their own benefit to the detriment of stockholders.
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