This paper develops a theory of mergers and divestitures wherein the motivation for mergers stems from the inability to finance marginally profitable, possibly short-horizon projects as stand-alone entities due to agency problems between managers and potential claimholders. A conglomerate merger...

This article develops a theory of mergers and divestitures. The motivation stems from an inability to finance marginally profitable projects as stand-alones due to agencyproblems. A conglomerate merger is a technology that allows these projects to survive a period of distress. If profitability...