Blockholders and Diversification

Little is known about the relationship between blockholders and their influence on firm’s level of diversification. This paper aims to contribute to already existing literature on both topics and to constitute a link between them. To do so the following research question is formed for my study: “What is the relationship between blockholders and the likelihood of firm diversification?” I provide empirical evidence on the influence of firm’s level of diversification by the presence of blockholders in a firm using a sample of 1,337 US firms. In order to present it I distinguish between two types of diversification – business and geographical, as well as com-puting two measures of them – the number of segments and Herfindahl index. Concerning blockholders I make a distinction between inside and outside blockholders, and as in the case of diversification I measure the presence of blockholders in two ways – by the number of in-side and outside blockholders and by the percentage of shares they hold respectively. My final data set consists of 11 variables. Based on distinction between two types of di-versification and two measures of them I constructed 4 dependent variables – Number of business segments, Number of geographical segments, Herfindahl index by business segments and Herfindahl index by geographical segments. Data set includes 7 independent variables that represent the factors which may influence the level of firm’s diversification, forming in total 5 variables in each analysed pattern. After performing a statistical analysis using Stata, 3 of these variables are found to have a significant relationship with Number of business seg-ments and Herfindahl index by business segments – Number of outsiders, Debt/assets and Assets; and only 1 variable is found to have a significant relationship with Number of geo-graphical segments and Herfindahl index by geographical segments – Assets. The findings suggest that the presence of outside blockholders decrease the likelihood of firm’s business diversification, while they are found to have no impact on geographical diver-sification. Concerning inside blockholder ownership, it is found to have no impact upon both types of diversification at all. I conclude that outside blockholders have a strong relationship with firm’s level of business diversification due to the so called “principal-agent” problem between them and managers. No impact of insiders on level of diversification is still not clear. However, I suggest that it may be due to the fact that inside blockholder ownership is not such a strong tool as many researchers suppose it to be. Relatively geographical diversification it needs further investigation, because insignificant results may have to do simply with US sam-ple and defining geographical diversification as firm activity that crosses country boarders.