Title: Corporate diversification and powerful CEOs

Authors: Fawzi Hyder; Mahsa Khoshnoud

Addresses: Charles M. Snipes College of Business and Economics, Lenoir-Rhyne University, 625 7th Ave Pl NE, Hickory, NC 28601, USA ' College of Business, Florida State University, 821 Academic Way, Tallahassee, FL 32306, USA

Abstract: This paper investigates the role of powerful CEOs in diversified firms and its association with the diversification discount. The presence of a powerful CEO implies weak corporate governance and a lack of internal control over the CEO's actions. Using a sample of single- and multi-segment firms over the period 1996-2015, we examine the relationship between firm value, CEO power, and the level of corporate diversification, measured by the number of segments operated by the diversified firm and the level of sales dispersion among these segments. The results reveal a significant correlation between the diversification discount and the level of diversification in diversified firms. Notably, the negative impact of CEO power on firm value is more pronounced in highly diversified firms. Additionally, firms with powerful CEOs are more likely to exhibit higher levels of corporate diversification and suffer more from the diversification discount. These findings collectively support the notion that agency problems are more evident in diversified firms and highlight the association between CEO power and the level of corporate diversification.

Keywords: firm value; corporate diversification; diversification discount; CEO power.

DOI: 10.1504/AJFA.2023.136687

American Journal of Finance and Accounting, 2023 Vol.7 No.3/4, pp.214 - 234

Received: 12 Feb 2023
Accepted: 11 Sep 2023
Published online: 16 Feb 2024 *

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