Corporate diversification and CEO turnover in family businesses: self-entrenchment or risk reduction?

Corporate diversification and CEO turnover in family businesses: self-entrenchment or risk... Our study investigates differences in CEO turnover between focused and diversified firms to determine whether diversification strategies are necessarily associated with governance efficiency in family businesses. We find that large family CEO firms are more likely to engage in corporate diversification than are small non-family CEO firms and their CEOs are seldom replaced. Large family CEO diversified firms also have lower turnover sensitivity relative to focused firms. The results imply that the CEOs of diversified firms have entrenched themselves, thereby increasing agency costs within family businesses. However, we fail to find diversification discounts in family businesses. It is interesting that CEOs tend to diversify their businesses in order to decrease firm risk. Founding families favor risk-reducing decisions in order to maintain family wealth and prestige; suggesting that family businesses are more interested in survival than growth. Although family businesses may benefit from risk reduction, a negative relationship between diversification level and CEO turnover is still evidence of poor corporate governance. Agency theory may not completely account for the adoption of diversification strategies in family businesses and corporate diversification may weaken the effectiveness of internal monitoring mechanisms. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Small Business Economics Springer Journals

Corporate diversification and CEO turnover in family businesses: self-entrenchment or risk reduction?

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Publisher
Springer US
Copyright
Copyright © 2007 by Springer Science+Business Media, LLC
Subject
Business and Management; Management; Microeconomics; Entrepreneurship; Industrial Organization
ISSN
0921-898X
eISSN
1573-0913
D.O.I.
10.1007/s11187-007-9073-y
Publisher site
See Article on Publisher Site

Abstract

Our study investigates differences in CEO turnover between focused and diversified firms to determine whether diversification strategies are necessarily associated with governance efficiency in family businesses. We find that large family CEO firms are more likely to engage in corporate diversification than are small non-family CEO firms and their CEOs are seldom replaced. Large family CEO diversified firms also have lower turnover sensitivity relative to focused firms. The results imply that the CEOs of diversified firms have entrenched themselves, thereby increasing agency costs within family businesses. However, we fail to find diversification discounts in family businesses. It is interesting that CEOs tend to diversify their businesses in order to decrease firm risk. Founding families favor risk-reducing decisions in order to maintain family wealth and prestige; suggesting that family businesses are more interested in survival than growth. Although family businesses may benefit from risk reduction, a negative relationship between diversification level and CEO turnover is still evidence of poor corporate governance. Agency theory may not completely account for the adoption of diversification strategies in family businesses and corporate diversification may weaken the effectiveness of internal monitoring mechanisms.

Journal

Small Business EconomicsSpringer Journals

Published: Sep 18, 2007

References

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