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Bullish or Foolish? Collective Expectations and Diversification in the Venture Capital Industry
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Author: Jade Lo, Drexel U.
Author: Lei Xu, Texas Tech U.
Author: Haemin Dennis Park, U. of Texas at Dallas
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We examine how collective expectations affect firm diversification behavior in the U.S. venture capital (VC) industry. Departing from prior accounts that focus on potential benefits and costs of diversification, we theorize how elevated collective expectations—signaled by trends in the broader environment, such as initial public offering (IPO) activities—encourage firms to venture into new industries, resulting in higher levels of diversification. However, not all firms are equally likely to diversify during a boom. We predict why some firms are more susceptible than others based on two theoretical approaches to social influence. The rational-actor account suggests that a firm’s tendency to diversify during the boom will be contained by its experience; whereas the embedded-actor account suggests that this tendency is moderated by a firm’s immediate network and the local community. We further posit that a firm’s diversification behavior during the boom will lead to a subsequent worse performance. We test these predictions with all U.S.-based VC investments from 1990 to 2016. Results support our arguments that firms tend to diversify during a boom and that doing so has negative performance implications. Moreover, our findings lend stronger support for the embedded-actor account compared to the rational-actor account.
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Paper is No Longer Available Online: Please contact the author(s).
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A Safety Valve: Hierarchical Similarity and Diversification in Family-Controlled Firms
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Author: Yidi Guo, School of Economics and Management Tsinghua U.
Author: Xiaowei Luo, INSEAD
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We propose a novel structural explanation of unrelated diversification in corporations. When the dominant coalition consists of leaders of similar hierarchical ranks, there can be tension between these powerful individuals. Such tension can result in unrelated diversification, as the relatively independent business terrains allow the corporate elite to exert their influence separately. We test this argument in the context of family-controlled publicly listed firms in China, where the dominant coalition and hierarchical similarity can be clearly identified. Results show a strong positive relationship between hierarchical similarity in the controlling family and unrelated corporate diversification, and such a relationship is further strengthened when the chair is female, firm performance is poor, or family corporate elites involved are not from a single nuclear family. This study contributes to research on diversification by discovering an underexplored source of structural tension, and extends research on organizational hierarchy by establishing an important strategic consequence of lack of clear hierarchy.
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Paper is No Longer Available Online: Please contact the author(s).
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Performance of diversified business group affiliated firms in India: An Agency view
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Author: Anish Purkayastha, U. of Sydney Business School
Author: Atul Arun Pathak, Indian Institute of Management Nagpur
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In this paper, we study how the heterogeneity among business groups (BGs) creates principal-agent and principal-principal type agency problems and negatively influences the performance of BG affiliated firms in emerging economies. Drawing upon learning theory, we argue that internationalization reduces some of these agency issues and brings certain advantages to emerging economy diversified BGs as internationalization complements their domestic competitive advantage. In addition, we argue that positive stewardship arising from high promoter block holdings works in favor of emerging economy diversified BG affiliated firms to improve their performance. Our arguments find empirical support in a sample of 828 Indian BGs affiliated and stand-alone firms, over the period from 2005-2014.
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Paper is No Longer Available Online: Please contact the author(s).
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Who Takes on the Small Producers? The Role of Emergent Portfolio Dynamics
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Author: Tunde Cserpes, Aarhus BSS, Aarhus U.
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In this paper, I combine insights from economic and valuation-based theories to examine the factors of niche product representation and portfolio expansion. Building on the premise that different theories might have different explanatory potential on different levels of analysis, I outline expectations based on economies of scale, value homophily, and the lived experience of industry participants. I use the empirical case of beer wholesaling, a reactionary industry segment, in which firms were reacting to the changing conditions in beer production. The change entailed the emergence of a niche market segment, the increased market entry of small-scale producers. I conduct two analyses using a proprietary dataset. First, I analyze what accounts for a wholesaler’s decision to add any craft producers to its portfolio. Second, I answer what accounts for a portfolio with a wider variety of craft brands. I find that it is the firms with high sales values that have a higher likelihood of representing any craft labels; value homophily matters less. Moreover, there is a local logic to the composition of beer labels in a given portfolio, and this fit positively affects both craft representation and portfolio diversity. Finally, while ‘good renegade’ labels hinder access to portfolios of latecomer producers in most areas, they facilitate portfolio diversity in highly competitive environments. The discussion explores the generalizability of the good renegade concept and its connections to organizational inequality. This paper calls for extending current research frameworks in economic sociology that allow studying firm behavior using both economic and sociological lenses.
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Paper is No Longer Available Online: Please contact the author(s).
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