IDEAS home Printed from https://ideas.repec.org/a/eee/jbrese/v151y2022icp593-608.html
   My bibliography  Save this article

Peer directors’ effort, firm efficiency and performance of diversified firms: An efficacy-based view of governance

Author

Listed:
  • Arora, Punit
  • Gaur, Ajai

Abstract

Studying how boards contribute to firm performance and examining implementation costs associated with diversification strategy are domains of growing interest to strategy scholars. We integrate these incipient literatures to examine the role of Peer Independent Executive Directors’ (PIED) effort in improving the performance of diversified firms. The efficacy-based view of governance that we propose in this paper contributes to both corporate governance and diversification research by highlighting the contextual role of director domain expertise and effort in improving firm performance. Using a longitudinal sample of US firms, we show that the PIED effort is progressively beneficial for firm performance with successive increases in diversification levels, irrespective of diversification type. In case of diversified firms, PIED effort helps a firm better manage internal dynamics and opportunism among various business segments within a firm to benefit from complex diversification strategies.

Suggested Citation

  • Arora, Punit & Gaur, Ajai, 2022. "Peer directors’ effort, firm efficiency and performance of diversified firms: An efficacy-based view of governance," Journal of Business Research, Elsevier, vol. 151(C), pages 593-608.
  • Handle: RePEc:eee:jbrese:v:151:y:2022:i:c:p:593-608
    DOI: 10.1016/j.jbusres.2022.07.035
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0148296322006464
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.jbusres.2022.07.035?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Fama, Eugene F & Jensen, Michael C, 1983. "Agency Problems and Residual Claims," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 327-349, June.
    2. Hausman, Jerry A & Taylor, William E, 1981. "Panel Data and Unobservable Individual Effects," Econometrica, Econometric Society, vol. 49(6), pages 1377-1398, November.
    3. Jacquemin, Alexis P & Berry, Charles H, 1979. "Entropy Measure of Diversification and Corporate Growth," Journal of Industrial Economics, Wiley Blackwell, vol. 27(4), pages 359-369, June.
    4. Fahlenbrach, Rüdiger & Low, Angie & Stulz, René M., 2010. "Why do firms appoint CEOs as outside directors?," Journal of Financial Economics, Elsevier, vol. 97(1), pages 12-32, July.
    5. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 38(2), pages 112-134.
    6. repec:bla:jfinan:v:59:y:2004:i:2:p:479-506 is not listed on IDEAS
    7. Arora, Punit & De, Prabal, 2020. "Environmental sustainability practices and exports: The interplay of strategy and institutions in Latin America," Journal of World Business, Elsevier, vol. 55(4).
    8. Brian K. Boyd & Steve Gove & Michael A. Hitt, 2005. "Construct measurement in strategic management research: illusion or reality?," Strategic Management Journal, Wiley Blackwell, vol. 26(3), pages 239-257, March.
    9. Gavin J. Nicholson & Geoffrey C. Kiel, 2007. "Can Directors Impact Performance? A case‐based test of three theories of corporate governance," Corporate Governance: An International Review, Wiley Blackwell, vol. 15(4), pages 585-608, July.
    10. Raphael Amit & Joshua Livnat, 1988. "Diversification strategies, business cycles and economic performance," Strategic Management Journal, Wiley Blackwell, vol. 9(2), pages 99-110, March.
    11. Deeksha A. Singh & Ajai S. Gaur & Florian P. Schmid, 2010. "Corporate Diversification, TMT Experience, and Performance," Management International Review, Springer, vol. 50(1), pages 35-56, February.
    12. John R. Graham & Michael L. Lemmon & Jack G. Wolf, 2002. "Does Corporate Diversification Destroy Value?," Journal of Finance, American Finance Association, vol. 57(2), pages 695-720, April.
    13. Freixanet, Joan & Renart, Gemma, 2020. "A capabilities perspective on the joint effects of internationalization time, speed, geographic scope and managers’ competencies on SME survival," Journal of World Business, Elsevier, vol. 55(6).
    14. Venkat Kuppuswamy & Belén Villalonga, 2016. "Does Diversification Create Value in the Presence of External Financing Constraints? Evidence from the 2007–2009 Financial Crisis," Management Science, INFORMS, vol. 62(4), pages 905-923, April.
    15. Lee, Ji-Hwan & Gaur, Ajai S., 2013. "Managing multi-business firms: A comparison between Korean chaebols and diversified U.S. firms," Journal of World Business, Elsevier, vol. 48(4), pages 443-454.
    16. J. Myles Shaver, 2019. "Interpreting Interactions in Linear Fixed-Effect Regression Models: When Fixed-Effect Estimates Are No Longer Within-Effects," Strategy Science, INFORMS, vol. 4(1), pages 25-40, March.
    17. Meyer, Margaret & Milgrom, Paul & Roberts, John, 1992. "Organizational Prospects, Influence Costs, and Ownership Changes," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(1), pages 9-35, Spring.
    18. Tyson B. Mackey & Jay B. Barney & Jeffrey P. Dotson, 2017. "Corporate diversification and the value of individual firms: A Bayesian approach," Strategic Management Journal, Wiley Blackwell, vol. 38(2), pages 322-341, February.
    19. Martin J. Conyon & Simon I. Peck & Graham V. Sadler, 2001. "Corporate tournaments and executive compensation: Evidence from the U.K," Strategic Management Journal, Wiley Blackwell, vol. 22(8), pages 805-815, August.
    20. Bhaumik, Sumon & Driffield, Nigel & Gaur, Ajai & Mickiewicz, Tomasz & Vaaler, Paul, 2019. "Corporate governance and MNE strategies in emerging economies," Journal of World Business, Elsevier, vol. 54(4), pages 234-243.
    21. Dahiya, Sandeep & John, Kose & Puri, Manju & Ramirez, Gabriel, 2003. "Debtor-in-possession financing and bankruptcy resolution: Empirical evidence," Journal of Financial Economics, Elsevier, vol. 69(1), pages 259-280, July.
    22. Mukherjee, Debmalya & Makarius, Erin E. & Stevens, Charles E., 2018. "Business group reputation and affiliates’ internationalization strategies," Journal of World Business, Elsevier, vol. 53(2), pages 93-103.
    23. Talke, Katrin & Salomo, Sören & Rost, Katja, 2010. "How top management team diversity affects innovativeness and performance via the strategic choice to focus on innovation fields," Research Policy, Elsevier, vol. 39(7), pages 907-918, September.
    24. Debmalya Mukherjee & Satish Kumar & Naveen Donthu & Nitesh Pandey, 2021. "Research Published in Management International Review from 2006 to 2020: A Bibliometric Analysis and Future Directions," Management International Review, Springer, vol. 61(5), pages 599-642, October.
    25. Yakov Amihud & Baruch Lev, 1981. "Risk Reduction as a Managerial Motive for Conglomerate Mergers," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 605-617, Autumn.
    26. Evan Rawley, 2010. "Diversification, coordination costs, and organizational rigidity: evidence from microdata," Strategic Management Journal, Wiley Blackwell, vol. 31(8), pages 873-891, August.
    27. Stan Xiao Li & Royston Greenwood, 2004. "The effect of within‐industry diversification on firm performance: synergy creation, multi‐market contact and market structuration," Strategic Management Journal, Wiley Blackwell, vol. 25(12), pages 1131-1153, December.
    28. Ikujiro Nonaka, 1994. "A Dynamic Theory of Organizational Knowledge Creation," Organization Science, INFORMS, vol. 5(1), pages 14-37, February.
    29. Chinmay Pattnaik & Qiang Lu & Ajai S. Gaur, 2018. "Group Affiliation and Entry Barriers: The Dark Side Of Business Groups In Emerging Markets," Journal of Business Ethics, Springer, vol. 153(4), pages 1051-1066, December.
    30. Wilbur N. Moulton & Howard Thomas, 1993. "Bankruptcy as a deliberate strategy: Theoretical considerations and empirical evidence," Strategic Management Journal, Wiley Blackwell, vol. 14(2), pages 125-135, February.
    31. Moshe Farjoun, 1994. "Beyond Industry Boundaries: Human Expertise, Diversification and Resource-Related Industry Groups," Organization Science, INFORMS, vol. 5(2), pages 185-199, May.
    32. Ponomareva, Yuliya & Uman, Timur & Bodolica, Virginia & Wennberg, Karl, 2022. "Cultural diversity in top management teams: Review and agenda for future research," Journal of World Business, Elsevier, vol. 57(4).
    33. Ahmed, Anwer S. & Duellman, Scott, 2007. "Accounting conservatism and board of director characteristics: An empirical analysis," Journal of Accounting and Economics, Elsevier, vol. 43(2-3), pages 411-437, July.
    34. Constantinos C. Markides & Peter J. Williamson, 1994. "Related diversification, core competences and corporate performance," Strategic Management Journal, Wiley Blackwell, vol. 15(S2), pages 149-165, June.
    35. Masulis, Ronald W. & Mobbs, Shawn, 2014. "Independent director incentives: Where do talented directors spend their limited time and energy?," Journal of Financial Economics, Elsevier, vol. 111(2), pages 406-429.
    36. Kenneth E. Aupperle & William Acar & Debmalya Mukherjee, 2014. "Revisiting the fit-performance thesis half a century later: a historical financial analysis of Chandler's own matched and mismatched firms," Business History, Taylor & Francis Journals, vol. 56(3), pages 341-371, April.
    37. Vidhi Chhaochharia & Yaniv Grinstein, 2007. "Corporate Governance and Firm Value: The Impact of the 2002 Governance Rules," Journal of Finance, American Finance Association, vol. 62(4), pages 1789-1825, August.
    38. James D. Westphal & David H. Zhu, 2019. "Under the radar: How firms manage competitive uncertainty by appointing friends of other chief executive officers to their boards," Strategic Management Journal, Wiley Blackwell, vol. 40(1), pages 79-107, January.
    39. Baltagi, Badi H. & Bresson, Georges & Pirotte, Alain, 2002. "Comparison of forecast performance for homogeneous, heterogeneous and shrinkage estimators: Some empirical evidence from US electricity and natural-gas consumption," Economics Letters, Elsevier, vol. 76(3), pages 375-382, August.
    40. Brambor, Thomas & Clark, William Roberts & Golder, Matt, 2006. "Understanding Interaction Models: Improving Empirical Analyses," Political Analysis, Cambridge University Press, vol. 14(1), pages 63-82, January.
    41. Denis, David J & Denis, Diane K & Sarin, Atulya, 1997. "Agency Problems, Equity Ownership, and Corporate Diversification," Journal of Finance, American Finance Association, vol. 52(1), pages 135-160, March.
    42. Emilie R. Feldman & Cynthia A. Montgomery, 2015. "Are incentives without expertise sufficient? Evidence from fortune 500 firms," Strategic Management Journal, Wiley Blackwell, vol. 36(1), pages 113-122, January.
    43. Yakov Amihud & Baruch Lev, 1999. "Does corporate ownership structure affect its strategy towards diversification?," Strategic Management Journal, Wiley Blackwell, vol. 20(11), pages 1063-1069, November.
    44. Brian K. Boyd, 1995. "CEO duality and firm performance: A contingency model," Strategic Management Journal, Wiley Blackwell, vol. 16(4), pages 301-312.
    45. Emilie R. Feldman, 2014. "Legacy Divestitures: Motives and Implications," Organization Science, INFORMS, vol. 25(3), pages 815-832, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jingsheng Lei & Sha Lin & M. Riaz Khan & Siman Xie & Muhammad Sadiq & Rashid Ali & Muhammad Farhan Bashir & Luqman Shahzad & Sayed M. Eldin & Ali H. Amin, 2022. "Research Trends of Board Characteristics and Firms’ Environmental Performance: Research Directions and Agenda," Sustainability, MDPI, vol. 14(21), pages 1-25, November.
    2. Barros, Victor & Verga Matos, Pedro & Miranda Sarmento, Joaquim & Rino Vieira, Pedro, 2024. "ESG performance and firms’ business and geographical diversification: An empirical approach," Journal of Business Research, Elsevier, vol. 172(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Cynthia E. Clark & Punit Arora & Patricia Gabaldon, 2022. "Female Representation on Corporate Boards in Europe: The Interplay of Organizational Social Consciousness and Institutions," Journal of Business Ethics, Springer, vol. 180(1), pages 165-186, September.
    2. Fuente, Gabriel de la & Velasco, Pilar, 2020. "Capital structure and corporate diversification: Is debt a panacea for the diversification discount?," Journal of Banking & Finance, Elsevier, vol. 111(C).
    3. Mo Chen & Aseem Kaul & Brian Wu, 2019. "Adaptation across multiple landscapes: Relatedness, complexity, and the long run effects of coordination in diversified firms," Strategic Management Journal, Wiley Blackwell, vol. 40(11), pages 1791-1821, November.
    4. Liu-Ching Tsai & Chaur-Shiuh Young & Hui-Wen Hsu, 2011. "Entrenched controlling shareholders and the performance consequences of corporate diversification in Taiwan," Review of Quantitative Finance and Accounting, Springer, vol. 37(1), pages 105-126, July.
    5. Ljubownikow, Grigorij & Ang, Siah Hwee, 2020. "Competition, diversification and performance," Journal of Business Research, Elsevier, vol. 112(C), pages 81-94.
    6. Guang‐Zheng Chen & Edmund C. Keung, 2018. "Corporate diversification, institutional investors and internal control quality," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(3), pages 751-786, September.
    7. Jaeho Choi & Anoop Menon & Haris Tabakovic, 2021. "Using machine learning to revisit the diversification–performance relationship," Strategic Management Journal, Wiley Blackwell, vol. 42(9), pages 1632-1661, September.
    8. Mehmet Nasih Tağ, 2022. "The Dark Side of Firm Diversity: An Empirical Examination of the Impact of Firm Diversity on Resource Allocation Efficiency in Multidivisional Firms," Istanbul Business Research, Istanbul University Business School, vol. 51(2), pages 643-668, November.
    9. Zinnia Mitra Bose & Indrani Chakraborty, 2022. "Effects of diversification on firm performance: an analysis of Indian firms," Indian Economic Review, Springer, vol. 57(2), pages 469-511, December.
    10. Kim, Kong-Hee & Al-Shammari, Hussam A. & Kim, Bongjin & Lee, Seung-Hyun, 2009. "CEO duality leadership and corporate diversification behavior," Journal of Business Research, Elsevier, vol. 62(11), pages 1173-1180, November.
    11. Emilie R. Feldman & Claudine Gartenberg & Julie Wulf, 2018. "Pay inequality and corporate divestitures," Strategic Management Journal, Wiley Blackwell, vol. 39(11), pages 2829-2858, November.
    12. Friberg, Richard, 2019. "All the bottles in one basket? Diversification and product portfolio composition," CEPR Discussion Papers 14119, C.E.P.R. Discussion Papers.
    13. Oesterle, Michael-Jörg & Richta, Hannah Noriko & Fisch, Jan Hendrik, 2013. "The influence of ownership structure on internationalization," International Business Review, Elsevier, vol. 22(1), pages 187-201.
    14. Jiraporn, Pornsit & Kim, Young Sang & Davidson III, Wallace N., 2008. "Multiple directorships and corporate diversification," Journal of Empirical Finance, Elsevier, vol. 15(3), pages 418-435, June.
    15. Lee, Hyunmin, 2023. "Strategic similarity in the co-evolution of technological and business diversification for firm growth: Evidence from smart-manufacturing related firms," Technological Forecasting and Social Change, Elsevier, vol. 189(C).
    16. Nur Ain Shahrier & Jessica Sze Yin Ho & Sanjaya Singh Gaur, 2020. "Ownership concentration, board characteristics and firm performance among Shariah-compliant companies," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 24(2), pages 365-388, June.
    17. Jose Manuel Campa & Simi Kedia, 2002. "Explaining the Diversification Discount," Journal of Finance, American Finance Association, vol. 57(4), pages 1731-1762, August.
    18. Stefan Erdorf & Thomas Hartmann-Wendels & Nicolas Heinrichs & Michael Matz, 2013. "Corporate diversification and firm value: a survey of recent literature," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 27(2), pages 187-215, June.
    19. Elif AKBEN SELCUK, 2014. "Corporate Diversification, Group Affiliation and Firm Value: Evidence From Turkey," Journal of BRSA Banking and Financial Markets, Banking Regulation and Supervision Agency, vol. 8(2), pages 151-174.
    20. Angélica María Sánchez-Riofrío & Luis Ángel Guerras-Martín & Francisco Javier Forcadell, 2015. "Business portfolio restructuring: a comprehensive bibliometric review," Scientometrics, Springer;Akadémiai Kiadó, vol. 102(3), pages 1921-1950, March.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jbrese:v:151:y:2022:i:c:p:593-608. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jbusres .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.