Session 227

Corporate Strategy & Diversification

Track F

Date: Wednesday, October 14, 2009

 

Time: 10:00 – 11:15

Paper

Room: Meeting Room 3


Session Chair:
Todd Alessandri, Northeastern University

Title: International Diversification and Managerial Ownership: Balancing Managerial Risk

Authors

  • Todd Alessandri, Northeastern University
  • Anju Seth, Virginia Tech

Abstract: The linkage between diversification and managerial incentives has been the subject of considerable debate. Managerial ownership is one form of governance used to control managerial tendencies toward value-destroying industrial diversification. However, the linkage between international diversification and managerial ownership has received little attention. In this study, we explore the effects of changes in international diversification on managerial ownership. In addition, we explore the interaction effects of industrial diversification on this linkage. We use a managerial risk perspective to motivate our hypotheses. Our findings indicate a positive relationship between change in international diversification and managerial ownership. This relationship is positively moderated by industrial diversification. Lastly, we found no support for changes in managerial ownership influencing international diversification.

Title: Skill, Luck, and Reputation in Product Diversification Decisions: Evidence From Hedge Funds

Authors

  • Evan Rawley, Columbia University
  • Rui De Figueiredo, University of California-Berkeley

Abstract: This paper examines how skill, luck and reputation influence firm product diversification decisions. We hypothesize that skill and luck drive firm performance and reputation. However, conditional on current reputation, future expected reputation effects reduce the attractiveness of product diversification for lower ability firms. We test these predictions using a large panel dataset on the global hedge fund industry. Our key results show that within-fund changes in returns are negative following diversification, but post diversification returns are 15-20 basis points per month higher in multi-fund firms compared to a matched control sample of focused firms. We interpret the results as evidence that firms exploit asymmetric information about their own ability to time new product launches, yet, reputation effects limit product diversification opportunities for lower ability firms.

Title: The Effects of Uncertainty on the Performance of Diversification Strategies

Authors

  • David Bryce, Brigham Young University

Abstract: In this paper, we explore the impact of uncertainty on the performance of diversification strategies. Uncertainty arises from at least two sources in the decision to diversify: Uncertainty about how a firm’s existing resources relate to those required in potential targets; and uncertainty about the profits available to the firm from entering potential targets. The costs of uncertainty are examined by comparing performance under optimal diversification to performance under decision heuristics that are likely to be employed by firm actors seeking to manage uncertainty. We show that sources of uncertainty can have a significant impact on the profitability of diversification strategies and discuss how choice of decision heuristic in choosing markets can mitigate some of this uncertainty.

Title: The Relative Size Effect on Capital Allocations

Authors

  • David Bardolet, Bocconi University
  • Dan Lovallo, University of Sydney
  • Richard Rumelt, University of California-Los Angeles
  • Craig Fox, University of California-Los Angeles

Abstract: We investigate the effect of the relative size of a business with respect to the size of the rest of its corporation on capital investment behavior. We find higher investment when a business is smaller relative to the rest of its firm, holding everything else constant. This result agrees with the claim that multi-business corporations are inefficient in allocating capital and suggests that managers might be biased toward even allocations. We offer a behavioral account to explain this phenomenon, namely “naïve diversification”, an alternative to the agency-based account proposed in the literature. Existing agency-based models do not readily explain the relative size effect. The conclusions of this paper are relevant to how organizational structure and psychological biases can affect investment behavior.

All Sessions in Track F...

Sun: 10:00 – 11:30
Session 260: Writing Workshop for Doctoral Students and Junior Faculty
Sun: 13:00 – 14:30
Session 261: Shareholder Primacy and Corporate Policy
Sun: 15:00 – 16:30
Session 262: The Role of Government in M&A Activity
Sun: 16:30 – 17:30
Session 310: Corporate Strategy & Governance, IG Meeting
Mon: 12:45 – 14:00
Session 198: Perspectives on CEO Succession
Session 228: Business Groups, Alliances, and Contracts
Mon: 15:45 – 17:00
Session 229: Alliances and Corporate Strategy
Session 230: Ownership Determinants and Consequences
Mon: 17:15 – 18:30
Session 194: CEOs and Top Management Teams
Session 197: Diversity, Identity, and Corporate Governance
Session 233: Top Executives and Directors in Organizational Dynamics
Tue: 10:00 – 11:15
Session 199: Executive Compensation
Session 200: Social Psychological Perspectives of CEOs
Tue: 11:30 – 12:45
Session 195: Competitive Dynamics of Business Groups
Session 234: Constraints and Catalysts on Corporate Growth
Tue: 14:30 – 15:45
Session 226: Relatedness, Dominant Logics, and Other Diversification Logics
Session 231: Institutions and Agents
Wed: 10:00 – 11:15
Session 227: Corporate Strategy & Diversification
Session 232: Stakeholders in the Corporate Governance Equation
Wed: 11:30 – 12:45
Session 196: Behavioral Perspectives on Boards of Directors
Session 225: Acquisitions and Corporate Strategy


Strategic Management Society

Washington DC