Sources of CEO Power and Firm Diversification: How Threat Plays a Role

Different from extant studies examining the direct effect of CEO power on firm strategy, this study intends to explore how different sources of CEO power may affect firm diversification. Based on agency theory, I posit that CEO ownership power dampens firm diversification whereas CEO non-ownership power enhances firm diversification. In addition, this paper investigates how the influence of CEO power on firm diversification hinges on two types of threats. Specifically, as CEO tenure progresses, CEOs who feel the threat of incoming losses may increasingly use their power to enhance firm diversification. In contrast, the occurrence of firm’s negative events may propel CEOs to take risk-averse behaviors by reducing firm diversification because negative event signals the threat of losing control.