TEST OF THE RATIONALE FOR CONGLOMERATE MERGER - AGENCY COSTS OR PECKING ORDER

The article tests the validity of two contrasting views regarding the motivation for conglomerate merger. From the agency perspective, managers use conglomerate merger to diversify employment risk or to acquire a ''cash cow'' that reduces their need for external financing. The pecking order view argues that firms undertake conglomerate mergers when managers have concluded that related mergers are not attractive and that their skills can best be applied in an unrelated field. Empirical analysis allows the joint testing of variables significant in the pecking order framework and in agency-oriented discussions of conglomerate merger. The agency variables did not have significant effects on the incidence of conglomerate mergers. either singly or as a group. The variables deemed important in the pecking order framework, however, were generally statistically significant and of the hypothesized sign.