Managerial ownership and corporate diversification: a longitudinal view

Abstract

Strategy and finance research suggests that managerial ownership results in increased incentive alignment and therefore is negatively related to corporate diversification. Using a longitudinal approach, we develop arguments to examine whether managerial ownership is associated with subsequent changes in diversification and/or if diversification is associated with subsequent changes in ownership. The results indicate that levels of managerial ownership in one time period are not associated with subsequent changes in corporate diversification, which raises incentive alignment questions. We also find that higher levels of corporate diversification are associated with changes in managerial ownership, which suggests support for the employment risk-reduction perspective. This study provides important reasons to reassess the longitudinal implications of the managerial ownership-corporate diversification link from both theoretical and managerial perspectives.

Does concentration of ownership and family control affect specialisation/diversification business strategies?

“…We also considered the interaction between family control and concentration of ownership in order to assess possible differences in the behaviour of families due to differences in concentration of ownership. The results of the specialization strategy models (models 1, 3 and 4) reveal a positive impact of concentration of ownership on choice of this strategy, confi rming H1 (results similar to those obtained by Amihud & Lev [1] and Goranova et al [30]). Ownership concentration allows aligning the residual rights and controlling external investors, limiting managerial discretionality (agency problem type I) [67].…”

“…In this paper we mainly use the Agency Theory approach, according to which diversifi cation can be for effi ciency, management or tunnelling reasons, depending on degree of concentration of ownership and type of controlling shareholder. Although there is evidence of the importance of ownership structure and family ownership in degree of diversifi cation [3], [15], [16], [30], [31], [63], [71], results are by no means conclusive. Literature refers to both positive and negative effects of concentration of ownership and family ownership on degree and type of diversifi cation.…”

“…Shleifer and Vishny [67] say that concentration of ownership is the most direct way in which to align the residual rights and control of external investors, limiting managerial discretionality and eliminating tunnelling-induced ineffi ciencies [68]. On the other hand, when a fi rm's managers are also shareholders, the more shares they own, the more their interests are in line with those of other shareholders, so there will be less diversifi cation in the fi rm [6], [12], [17], [30]. In the specifi c case of family fi rms, the interests of family shareholders who are also managers will be in line with those of minority shareholders, so less diversifi cation is to be expected [4], [19], [30], [51], [55], [71].…”

“…On the other hand, when a fi rm's managers are also shareholders, the more shares they own, the more their interests are in line with those of other shareholders, so there will be less diversifi cation in the fi rm [6], [12], [17], [30]. In the specifi c case of family fi rms, the interests of family shareholders who are also managers will be in line with those of minority shareholders, so less diversifi cation is to be expected [4], [19], [30], [51], [55], [71]. Friedland, Palmer and Stenbeck [24] show that family fi rms have less incentive to diversify for social and fi nancial reasons.…”

“…However, less attention has been paid to the impact of ownership structure (concentration and main shareholder) on degree of business diversifi cation [13], [14], [16], [19], [30], [31], [63], [76]. Although some authors mention, in theoretical terms, the importance of concentration of ownership [2], [15], [30], [44] and the type of shareholder/s that effectively control the fi rm [19], [54] [55], [71], [75], in an analysis of business diversifi cation, very few studies have analyzed empirically said impact, with exceptions focusing on the US, European and Asian corporations [3], [11], [15], [19], [25], [27], [29], [40], [58], [50], [74]. The results found in the literature regarding corporate diversifi cation strategy are not conclusive, due to differences in the concept of diversifi cation and measurements used for its study [5], [49].…”