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Using a sample of 44,288 firm-years between 1984 and 1997, we document an increase in the extent of global diversification over time. This trend does not ref lect a substitution of global for industrial diversification. We also find that global diversification results in average valuation discounts of approximately the same magnitude as those for industrial diversification. Analysis of the changes in excess value associated with changes in diversification reveals that increases in global diversification reduce excess value, while reductions in global diversification increase excess value. These findings support the view that the costs of global diversification outweigh the benefits.

We provide evidence on the agency cost explanation for corporate diversification. We find that the level of diversification is negatively related to managerial equity ownership and to the equity ownership of outside blockholders. In addition, we report that decreases in diversification are associated with external corporate control threats, financial distress, and management turnover. These findings suggest that agency problems are responsible for firms maintaining value‐reducing diversification strategies and that the recent trend toward increased corporate focus is attributable to market disciplinary forces.

We document that forced resignations of top managers are preceded by large and significant declines in operating performance and followed by large improvements in performance. However, forced resignations are rare and are due more often to external factors (e.g., blockholder pressure, takeover attempts, etc.) than to normal board monitoring. Following the management change, these firms significantly downsize their operations and are subject to a high rate of corporate control activity. Normal retirements are followed by small increases in operating income and are also subject to a slightly higher than normal incidence of postturnover corporate control activity. * Krannert School of Management, Purdue University, West Lafayette, Indiana. We are grateful for helpful comments received from Linda DeAngelo, Rob Hansen, Greg Kadlec, Scott Lee, David Mayers, Dilip Shome, Ren6 Stulz (the editor), Michael Weisbach, Marc Zenner, two anonymous referees, and the workshop participants at North Carolina State University, Ohio State University, and Virginia Tech. This work has been partially supported by summer research grants from the Pamplin College of Business at Virginia Tech. 1 For an account of several recent board-initiated top management changes at large firms see Stewart (1993).2 This rate is computed as the total number of management changes divided by the total number of firm-years (1,689 firms times four years) in the sample. The rate will understate the true turnover rate to the extent that some firms are delisted (e.g., mergers, liquidations, etc.) between 1985 and 1988.3 Turnover rates conditional on other events related to corporate control or financial distress are much higher. Although not directly comparable due to differences in the definition of turnover and sampling periods, turnover rates are 42 percent following corporate takeovers (Martin and Mc-Connell (1991)), 44 percent following unsuccessful acquisition attempts (Agrawal and Walkling (1994)), 33 percent following negotiated block trades (Barclay and Holderness (1991)), 51 percent following proxy contests (DeAngelo and DeAngelo (1989)), 40 percent following defensive share repurchases and special dividends (Denis (1990)), 40 percent following greenmail payments (Klein and Rosenfeld (1988)), and 52 percent following the onset of financial distress (Gilson (1989)). held corporations, Journal of Financial Economics 23, 29-60. , 1990, Performance pay and top-management incentives, Journal of Political Economy 98, 225-264. Kaplan, Steven, 1989, The effects of management buyouts on operations and value, Journal of Financial Economics 24, 217-254. Kaplan, Steven, 1994, Top executive rewards and firm performance: A comparison of Japan and the U.S., Journal of Political Economy 102, 510-546.