Corporate Diversification, Managerial Entrenchment, and Corporate Governance: a Theoretical Framework Based on Agency Theory

Abstract

The relationship between corporate control mechanisms and managerial entrenchment has generated extensive debate, giving rise to divergent perspectives across competing theories of the firm. Contractual theories, particularly agency theory, constitute the dominant theoretical framework in corporate governance research. From this perspective, diversification strategy may be viewed as a managerial instrument through which executives pursue their own interests at the expense of shareholders' wealth maximization. Agency theory therefore examines how corporate governance mechanisms influence firms' diversification decisions.

Accordingly, this article is grounded in the corporate governance literature that highlights the risks associated with excessive managerial discretion in the absence of effective monitoring mechanisms. Its primary objective is to provide a theoretical analysis of the relationship between corporate control mechanisms and managerial entrenchment through the adoption of diversification strategies.

Furthermore, the paper proposes an empirical research agenda in the context of Algerian firms. More specifically, it seeks to examine, first, the extent to which managers may steer firms toward business sectors in which they possess distinctive competencies in order to strengthen their entrenchment and consolidate their position within the organization; and second, the effectiveness of corporate control mechanisms in constraining managerial discretion and limiting opportunistic managerial behavior.