Industry Structure and Value-motivated Conglomeration

Abstract

Agency problems are often cited to explain why managers diversify their firms even though diversification strategies are often claimed to destroy value. In theory, however, conglomeration can be beneficial and the popular press often discusses conglomeration decisions as being driven by industry conditions. We argue that value maximization theories of conglomeration imply that two industry factors (growth opportunities and industry concentration) are negatively related to predicted degrees of conglomeration and find empirical support in a panel of 50 industries across 20 years. Our study also documents that conglomerate structures are more valuable when industry conditions predict high levels of conglomeration. Although our evidence does not rule out the existence of agency-motivated conglomeration, we conclude that value-maximization plays an important role.