Who Drives Corporate Diversification: Owners or Managers?

Integrating Agency theory and institution based view, our study empirically examines the relationship between ownership structure and corporate diversification over three distinct phases of institutional development, in an Indian context. The conceptual model developed in this study is tested using a large sample of publicly traded companies in India. The study finds no evidence to support the agency theory of free cash flows as a valid argument for explaining the firm's unrelated diversification strategy. The study also shows that ownership type has a significant impact on unrelated diversification strategy, for all three phases of institutional development. However, the impact of ownership structure on the firm's diversification strategy does not vary for the three phases, in spite of differences in the national institutional context. In terms of managerial implications, this study provides empirical support for corporate diversification decisions in emerging institutional contexts.