The Effect of the Board Characteristics and Management Entrenchment on Firm Diversification Strategy

Abstract

The purpose of this paper is to examine the effect of the board characteristics and the management entrenchment on the diversification strategy at firms listed in Tehran Stock Exchange. In this regard, 110 companies were selected for the period 2008-2014. Panel data method was used to test the hypotheses. In order to examine board characteristics, board size and board independence proxies and to review the management entrenchment, CEO duality, managerial ownership and over investment risk were used. For measuring corporate diversification, Herfindahl and entropy were used. The results show that the size and independence board have negative and positive effects on corporate diversification. This means that company diversification is at high level with large boards and low independent board members. The results show that the CEO duality and the increase of over investment risk have a positive effect on corporate diversification, while managerial ownership has no effect on diversification. The results are consistent with agency theory. According to this theory, the increase in the conflict between shareholders and managers makes the internal managers motivated for opportunistic behavior in order to diversify their enterprise.

Keywords

• Board Characteristic
• Management Entrenchment
• Diversification
• Agency Theory