Ownership Types and Diversification Decisions: Evidence from Hospital Industry

Using the U.S. hospital industry from 2000 to 2006 as an empirical setting, we test the relationship between ownership types and diversification decisions. Based on agency theory and altruistic behavior theory, we argue that owners have different utilities and monitoring incentives related to the firms they own, resulting in different diversification decisions. Our empirical tests find that not-for-profit hospitals and government-owned hospitals are more likely to pursue a high level of diversification than for-profit hospitals. Additionally, we find that the relationship between not-for-profit hospital ownership and diversification is attenuated by buyer's strong outside monitoring. We also find that not-for-profit and government-owned hospitals are more likely to diversify into less profitable services, whereas for-profit hospitals are more likely to diversify into more profitable services. Overall, our study makes a strong case for the existence of a link between organization's ownership type and their strategic decisions.