Corporate diversification and powerful CEOs
by Fawzi Hyder; Mahsa Khoshnoud
American J. of Finance and Accounting (AJFA), Vol. 7, No. 3/4, 2023

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.

Online publication date: Fri, 16-Feb-2024

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