Behind the curtain of international diversification: An agency theory perspective

Abstract

Research Summary: This article dissects the antecedents of international diversification through the lens of the agency cost of free cash flow arguments. It explores whether the partial convergence of interests among managers, majority shareholders, and minority shareholders affects a firm's choice to diversify internationally. Using a sample panel of 60 Italian firms evaluated longitudinally from 2004 to 2014, the study tests whether a firm's international diversification is affected by its free cash flow (as the ultimate source of managerial discretion) and debt (as the main constraint to managerial discretion), especially in firm contexts that exacerbate agency problems. We find that the effects on international diversification of free cash flow and debt are contingent on ownership concentration, family control, and growth opportunities. Managerial Summary: This article studies the antecedents of international diversification by considering the conflicts of interest among managers, majority shareholders, and minority shareholders. First, it shows that the available cash flow (as the fundamental wellspring of managerial discretion) and level of indebtedness (as a key limitation to managerial discretion) have, respectively, a positive and a negative effect on firms' international diversification. Second, it shows that the effects of cash flow and debt are particularly relevant when considering three factors: (a) the concentration of firm ownership, leading to conflicts of interest between majority and minority shareholders; (b) family control, leading to conflicts of interest between family members and other shareholders; and (c) the potential to exploit growth opportunities, leading to conflicts of interest between managers and shareholders.

The Psychological Foundations of Management in Family Firms: Values, Biases, and Heuristics

“…Additionally, the family members’ ability to impose specific heuristics in making strategic decisions depends on factors including the composition of the board of directors (Bettinelli, 2011), the heterogeneity among the largest blockholders (Russino et al, 2019), the implementation of mechanisms to disconnect cash flow and control rights, such as pyramids or loyalty shares. Focusing on family firm resources, the available cash flow and level of indebtedness appear to be respectively a key source and limitation of managerial discretion (Dagnino et al, 2019). While the role of family business governance in changing the intensity of the relationship between heuristics, goals, and strategy would seem well-defined, the role of resources is not, even if it is reasonable to expect that the family firm’s available resources—not only financial but also human and social capital—will influence how the heuristics and biases determine the goals and the strategy.…”

Subsidiary power: Loaned or owned? The lenses of agency theory and resource dependence theory

“…The Dagnino, Giachetti, La Rocca, and Picone () study in this issue applies the agency theory perspective to international diversification. They explore differences in the interests among key stakeholders in the MNC by examining the extent to which they push for using the free cash flow for international diversification.…”

Past, ongoing, and future debate on the interplay between internationalization and digitalization

“…The main external variables are the stability and effectiveness of the political and legal environment (Tan and Chintakananda 2016), governance quality (Fainshmidt et al 2016), and the similarity of industry architectures of home and host countries (Jacobides and Kudina 2013). Internal variables relating to international growth are focus on product differentiation (Bloodgood et al 1996), proprietary capabilities (in technology and marketing, for instance) (Asmussen and Goerzen 2013), learning from early entries (Chang 1995), and financial resources (Dagnino et al 2019). From a governance perspective, authors show that conflicts between managers and shareholders and those among shareholders are crucial antecedents of the choice to enter new country markets (D'Angelo et al 2016;Majocchi and Strange 2012).…”