A Safety Valve: Hierarchical Similarity and Diversification in Family-Controlled Firms

Abstract

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.