OWNERSHIP AND DIVERSIFICATION - AGENCY THEORY OR STEWARDSHIP THEORY

Diversification is often seen as the opportunistic pursuit by incumben t management of their own self-interest at the expense of the sharehol ders who can, if they so desire, diversify their individual portfolios simply by buying shares in other companies. This reflects the influen ce of agency theory and managerialist theory as part of the growing or ganizational economics movement (see Barney, 1990). However, recently such views have been challenged by what its supporters have labelled s tewardship theory (Donaldson, 1990a; Donaldson and Davis, 1991), a fra mework which presumes that managers are seeking to maximize organizati onal performance. This article will examine corporate diversification in a way which bears on these two contrasting theoretical frameworks. Specifically, we seek to establish why firms diversified when they did . The evidence lends more support to stewardship theory than it does t o agency theory. In the next section we summarize the literature beari ng on why firms diversify and set out the research questions which mot ivated the study. This leads into a discussion of the empirical data, particularly those concerned with the ownership type (or governance st ructure) of the companies concerned. We are then in a position to conf ront our research questions with new evidence from large New Zealand c ompanies. The article ends with some general conclusions on what motiv ates diversification.