Learning Not to Diversify: The Transformation of Graduate Business Education and the Decline of Diversifying Acquisitions

The decline and fall of diversification as a legitimate corporate strategy occurred slowly in the United States despite mounting evidence against it. We argue that changes that occurred in a closely related field—graduate business education—were important in understanding the slow decline of diversification. Building on a historical account of the transformation of business education, we explain how the rise of financial economics and agency-theoretic logic in the MBA curriculum since the 1970s altered students’ view about diversification. Nearly twenty years later, these MBA graduates rose to top decision-making positions and put a break on diversification. Using the data on CEOs who ran major U.S. corporations from 1985 to 2005, we show that CEOs who earned an MBA before the 1970s actively pursued diversification, whereas the next generations of CEOs who absorbed agency-theoretic logic in financial economics refrained from it. Furthermore, we demonstrate that the two groups reacted differently to various moderating factors when making diversification decisions, which reflects the latter group’s acceptance of agency-theoretic logic. Our study therefore demonstrates that institutional change in one field (i.e., business education) contributed to change in another field (i.e., corporate diversification), albeit with a considerable time lag.