A stakeholder theory of corporate diversification

Broadly speaking, the focus of this dissertation is on corporate level strategy and the sources of value creation through diversification. Of particular interest are issues relating to the benefits of firm risk management and the impact of firm-specific asset investments made by a firm's employees, suppliers and customers on total firm value and equity holder wealth.; The dissertation is composed of three essays. The first essay develops a stakeholder-based reason for corporate diversification. It originated from the observation that most non-financial stakeholders of a firm have significant firm-specific asset investments. Since the risks associated with these assets are difficult to diversity, the firm often has an incentive to induce its stakeholders to make more firm-specific investments by engaging in risk management activities. This essay shows that corporate diversification may be particularly effective in inducing these stakeholders to make firm-specific investments.; In the second essay, a formal model is developed to examine the interaction of two risk management mechanisms: financial hedging and corporate diversification. At first it might appear that they are substitutive means of risk management. However, when hedging contracts are available for reducing a firm's risk exposures, the opportunity to hedge in financial markets changes the incentives to manage risks through diversification, because hedging contracts do not serve equally well for hedging different types of risks. The results of the model show that, contrary to common belief, the ability for firms to use financial hedging instruments can increase the benefit obtained from diversification.; The third essay empirically tests the stakeholder theory of corporate diversification developed in the first two essays. This essay describes the relationship between a firm's diversification strategy and the extent to which the firm relies on its stakeholders' firm-specific asset investments. Particularly, I examine the risk reduction potential through a firm's acquisition moves. The results indicate that when stakeholders' specific asset investments are important in a firm's operations, the firm has an incentive to engage in mergers or acquisitions that have relatively high risk-reduction potential.