Date of Award


Degree Type


Degree Name

Doctor of Philosophy (PhD)



First Advisor

Omesh Kini - Chair

Second Advisor

michael Rebello

Third Advisor

Lalitha Naveen

Fourth Advisor

Jayant Kale

Fifth Advisor

Shehzad Mian


WHAT DRIVES FIRMS TO DIVERSITY? By RONG GUO Committee Chair: Dr. Omesh Kini Major Department: Finance This paper examines whether corporate governance structures, serving as proxies for agency costs, can explain firms’ decision to diversify. Specifically, it has been hypothesized that firms with worse corporate governance structures are more likely to diversify. The extant literature usually compares the governance characteristics of multi-segment firms to those of single segment firms to address this issue. However, different governance characteristics may simply reflect differences in firm characteristics of diversified firms and focused firms. Furthermore, industry factors may affect both the propensity of firms to diversify and their governance characteristics. To separate out the agency costs explanation of firms’ decision to diversify, I compare the corporate governance structures of single segment firms that choose to diversify with those of a matched sample of single segment firms in the same industry that choose to remain focused. I find that firms with a higher percentage of outsiders on the board and smaller board size are more likely to diversify. These findings are inconsistent with the agency costs explanation of why firms choose to diversify. In addition, the CEO pay-to-performance sensitivity of diversifying firms is also not significantly different from that of firms that stay focused. The corporate governance characteristics cannot explain the changes in excess value around diversification either. Although some of the governance characteristics are significantly related to the announcement effects of diversifying mergers, these relations are often inconsistent with the agency cost explanation. Taken together, my evidence indicates that diversifying firms do not systematically have worse governance structures than firms that stay focused and, therefore, higher agency costs do not appear to drive the decision to diversify.