OWNERSHIP AND DIVERSIFICATION - AGENCY THEORY OR STEWARDSHIP THEORY

Diversification is often seen as the opportunistic pursuit by incumbent management of their own self-interest at the expense of the shareholders who can, if they so desire, diversify their individual portfolios simply by buying shares in other companies. This reflects the influence of agency theory and managerialist theory as part of the growing organizational economics movement (see Barney, 1990). However, recently such views have been challenged by what its supporters have labelled stewardship theory (Donaldson, 1990a; Donaldson and Davis, 1991), a framework which presumes that managers are seeking to maximize organizational 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 to agency theory. In the next section we summarize the literature bearing on why firms diversify and set out the research questions which motivated the study. This leads into a discussion of the empirical data, particularly those concerned with the ownership type (or governance structure) of the companies concerned. We are then in a position to confront our research questions with new evidence from large New Zealand companies. The article ends with some general conclusions on what motivates diversification.