Why Do Managers Choose Diversification? An Empirical Study

Compared with the researches before 1990, in recently years, there was an academic agreement that diversification generally reduce the performance of companies. So, why do managers still choose diversification in such a condition? What stimulated them to choose diversification? Based on the agency theory, this paper makes a deep observation of the reason why the managers diversify their companies. The unique difference between this paper with former researches is that this paper introduces two different viewpoints of agency theory--risk elusion and gaining private benefit. Further more, to get a more deep view of the managers' incentive to choose diversification, this paper divides the managers into two groups: big shareholder and managing team.A series of research show that, there are co-relativities between the level of diversification, the performance, the shareholder structure of a company. Through the analysis on the data of listed SOE from 2002 to 2004, this paper introduces a model designed by Aggarwal and Samwick in 2003 to judge why managers diversify their companies.