Is There an Association between Corporate Governance and Firm Diversification? An Empirical Study with Brazilian Companies

The strategy adopted by a company can be understood as the result of mechanisms and practices of corporate governance. In turn, the performance of a firm depends directly on the decisions made by its administrators. However, managers can incorporate their own personal interests in strategic decisions, creating a level of corporate diversification, according to the operation of the corporate government. Thus, the objective of this study is to investigate, empirically, if the structure of governance is different between focused and diversified firms and, furthermore, if differences in corporate governance are associated with some loss of value for the firm from the diversification. This study consists of a multiple cross section extending from 1997 to 2001. Data from 176 companies with open capital listed on the Satilde;o Paulo Stock Exchange (Bovespa) were used, representing 14 industry segments. The results of the multivariable analysis reveal that the size of the board of directors (InTAMC) and the participation of the executives in the profit (profit sharing) of the company (PART) are positively associated with the diversification of the firm (HPROD). Moreover, the companies with private national capital (CNTR) appeared more diversified than those with government capital; however it is important to recognize that these associations were not constant for the entire length of the study period