Navigating Diversification: The CEO’s Human Capital Influence on Firm’s Diversification Strategy and Performance

Abstract

Diversification strategies remain a focal point in strategic management, yet conflicting findings persist regarding the relationship between diversification and performance. This paper intends to disentangle these conflicting findings by examining the role of CEO’s human capital in shaping firm strategy and performance within the context of related and unrelated diversification. Drawing on matching theory and the upper echelons literature, performance implications of diversification types depend on the alignment between CEO’s human capital and chosen strategy. Empirical analysis, based on Fortune 500 CEO appointments between 2000-2020, uses OLS regressions with random effects and Two-Stage Least Squares (2SLS) regressions. The findings reveal that outsider CEOs are negatively associated with related diversification, career variety is negatively associated with related and positively with unrelated diversification, and the fit between outsider status and diversification strategy determines firm performance. The findings contribute to the ongoing discourse on diversification, CEO characteristics, and their intricate interplay in influencing organizational outcomes.

Keywords

CEO human capital related diversification unrelated diversification diversification performance outsider CEOs CEO characteristics alignment

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