AGENCY PROBLEMS, EQUITY OWNERSHIP, AND CORPORATE DIVERSIFICATION

We provide evidence on the agency cost explanation for corporate diver sification. We find that the level of diversification is negatively re lated to managerial equity ownership and to the equity ownership of ou tside blockholders. In addition, we report that decreases in diversifi cation are associated with external corporate control threats, financi al distress, and management turnover. These findings suggest that agen cy problems are responsible for firms maintaining value-reducing diver sification strategies and that the recent trend toward increased corpo rate focus is attributable to market disciplinary forces.