Ownership Effects on Unrelated Diversification: An Institutions’ Perspective

To show that differences in the extent to which firms engage in unrelated diversification can be attributed to differences in ownership structure.

We draw on longitudinal data and use a panel analysis specification to test our hypotheses.

We find that unrelated diversification destroys value; pressure-sensitive Anglo-American owners in a firm’s equity reduce unrelated diversification, whereas pressure-resistant domestic owners increase unrelated diversification; the greater the firm’s free cash flow, the greater the negative effect of pressure-sensitive Anglo-American owners on unrelated diversification.

We contribute to corporate governance and strategy research by bringing in owners’ institutional origin as a shaper of owner preferences in particular with regards to unrelated diversification. Future research may expand our investigation to more than one home institutional context, and theorize on institutional origin effects beyond the dichotomy between Anglo-American and non-Anglo-American (not oriented toward shareholder value maximization) owners.

Policy makers, financial analysts, owners, and managers may want to reflect about the implications of ownership structure, as well as promoting or joining corporations with particular ownership configurations.

A shareholder value-destroying strategy, such as unrelated diversification has adverse consequences for society at large, in terms of opportunity costs, that is, resources could be allocated to value-creating activities instead. Promoting an ownership configuration that creates value should contribute to social welfare.

Owners may not be exclusively driven by shareholder value maximization, but can be influenced by normative beliefs (biases) stemming from the institutional context they originate from.