1 INTRODUCTION The implementa ti on of diversifica ti on strategies to boost company performance has been of consid ‐ erable interest to many previous studies in strategic management (Palich, Cardinal, & Miller, 2000; Mackey, Barney, & Dotson, 2017; Subramaniam & Wasiuzzaman, 2019), but it is apparent that the im ‐ pact of diversifica ti on s ti ll generates much debate given the mixed findings (Palich et al., 2000; Volkov & Smith, 2015). Some studies revealed that imple ‐ men ti ng a diversifica ti on strategy can adversely the performance a ffect (Zhou, 2011; Hashai, 2015; Gyan, 2017), which is in contrast to other studies that pinpointed how diversifica ti on strategies actu ‐ ally can improve the company performance (Kup ‐ puswamy & Villalonga, 2016; Chan, Bany ‐Ari ffin, and Nasir, 2019). One of the factors causing the di ffering re ‐ search results is the use of variables that moderate the rela ti onship between diversifica ti on and com ‐ pany performance (de Andrés, Fuente, & Velasco, 2017). Among these factors is corporate gover ‐ nance, which includes the level of supervision and chief execu ti ve o fficer (CEO) performance (Jara ‐ Ber ti n, 2015). In par ti cular, diversifica ti on can cause a company’s organiza ti onal structure to expand, which leads to higher informa ti on asymmetry. Such an issue poses great di fficulty for coordina ti on and supervision (Bushman, Chen, Engel, & Smith, 2004; Rodríguez ‐Pérez & Van Hemmen, 2010), decreasing the company’s performance. The increasingly complex coordination in companies with a broader organizational structure makes it vital to establish an effective coordina ‐ This study examined the e ffect of diversifica ti on strategies on firm performance and the extent to which the chief ex ‐ ecu ti ve o fficer (CEO) commitment moderates this rela ti onship. The e ffect of diversifica ti on on firm performance was analyzed in a sample with both above ‐average and below ‐average diversifica ti on levels. The sample consisted of 76 manufacturing companies listed on the Indonesia Stock Exchange (IDX) from 2007 to 2018, which were analyzed using panel data regression with a balanced panel. Tobin’s Q was u ti lized to measure firm performance, compounded with three measures of diversifica ti on strategies: entropy index, Herfindahl index, and the number of segments. The results show that diversifica ti on leads to lower firm performance, whereas CEO commitment eliminates the nega ti ve influence of diversifica ti on on company performance in all measurement models (i.e., entropy, Herfindahl index, and the number of segments). Accordingly, the nega ti ve e ffect of diversifica ti on strategies and consistent CEO commitment were ob ‐ served among the samples with high and low diversifica ti on levels. Keywords: diversifica ti on, firm performance, corporate governance, CEO commitment Dynamic Rela ti onships Management Journal, Vol. 10, No. 2, November 2021 19 DIVERSIFICATION, CEO COMMITMENT, AND FIRM PERFORMANCE Engelbertha E. Silalahi Faculty of Economics and Business, Atma Jaya Catholic University of Indonesia engelberthaesilalahi@gmail.com Irenius Dwinanto Bimo Faculty of Economics and Business, Atma Jaya Catholic University of Indonesia irenius.dwinanto@atmajaya.ac.id Abstract Vol. 10, No. 2, 19 ‐29 doi:10.17708/DRMJ.2021.v10n02a02 Dynamic Rela ti onships Management Journal, Vol. 10, No. 2, November 2021 20 Engelbertha E. Silalahi, Irenius Dwinanto Bimo: Diversifica ti on, CEO Commitment, and Firm Performance tion function (Chandler, 1962). Coordination be ‐ tween all elements in a business entity is an es ‐ sential determinant of the company’s operational quality (Cha, Kim, Lee, & Bachrach, 2015), and at a managerial level, the person responsible for ex ‐ ecuting the coordination function is top manage ‐ ment or the chief executive officer. The greater the CEO’s commitment to handling the coordina ‐ tion and supervision tasks at a company, the bet ‐ ter is the coordination function. Likewise, the CEO’s commitment to be involved in coordination across divisions determines the efficacy of diver ‐ sification strategies. Much of the research on diversifica ti on and firm performance originally stems from various— and at ti mes contradictory—perspec ti ves on diver ‐ sifica ti on prac ti ces. One theory, for example, posits that a diversified company can cross ‐subsidize be ‐ tween segments, whereas another theory suggests that diversifica ti on may harm firm performance considering the mo ti va ti on for such decisions—for example, management’s opportunis ti c behavior (Volkov & Smith, 2015). From the concept of economies of scale (Rumelt, 1974), diversifica ti on is observed to increase company performance, which was corroborated by Chan et al. (2019), who main ‐ tained that the op ti mal use of resources as a conse ‐ quence of sharing of resources can help achieve economies of scale and ul ti mately improve com ‐ pany performance. However, in agency theory, di ‐ versifica ti on is argued to increase informa ti on asymmetry and coordina ti on costs, which will re ‐ duce firm performance (Hernández ‐Trasobares & Galve ‐Górriz, 2017). Because of the opposing findings and theories regarding the actual impacts of diversifica ti on, this study sought to enrich the literature on the rela ti on ‐ ship between diversifica ti on and firm performance. In contrast to previous studies (Hernández ‐Traso ‐ bares & Galve ‐Górriz, 2017; Chan et al., 2019), this study examined the direct e ffect of diversifica ti on strategies on company performance and the role of CEO commitment as the modera ti ng variable. This study also analyzed both full sample and specific samples with di fferent diversifica ti on levels, that is, those above and below the average level. Diversifi ‐ ca ti on levels in this study were measured using sev ‐ eral diversifica ti on measurement methods, namely the entropy index, the Herfindahl index, and the number of segments. The purpose of using di fferent measurement techniques was to test the data ro ‐ bustness. To provide a solid empirical contribu ti on, this study used the panel data analysis method (i.e., balanced panel) to test the hypothesis. By combin ‐ ing both cross ‐sec ti on and ti me ‐series data, this method can thus eliminate any collinearity between variables, increase degrees of freedom, boost e ffi ‐ ciency, and minimize bias (Gujara ti , 2004). 2 THEORETICAL BACKGROUND 2.1 Diversifica ti on and Firm Performance Diversifica ti on is a strategy used by companies to market their products, goods, or services for dif ‐ ferent segments (Anso ff, 1957). Companies com ‐ monly strive to expand their market segmenta ti on by either crea ti ng new businesses and product types (Gyan, 2017) or enriching their product port ‐ folios (Chan et al., 2019). Several aspects are con ‐ sidered when a company implements diversifica ti on strategies, such as the tendency to decrease market demand for the products, the bolstering of the com ‐ pany’s compe titi ve advantage, profit stability, tech ‐ nological developments, the alloca ti on of retained earnings for investment, and risk distribu ti on (An ‐ so ff, 1957; Lizares, 2019). Furthermore, diversifica ti on allows manage ‐ ment to op ti mize the u ti liza ti on of resources owned by the company. Resources include tangible re ‐ sources such as produc ti on capacity, machinery, equipment, and other produc ti on facili ti es, as well as intangible resources such as management capa ‐ bili ti es, company reputa ti on, and informa ti on (Chartejee & Wernerfelt, 1991). Prahalad & Hamel (1990) stated that economies of scale can grow when companies use produc ti on factors concur ‐ rently for each business line. Diversification of resources and activities can benefit companies because they then are able to take advantage of investment opportunities to create added value (Mackey, 2017). In the context of strategic management, diversification can in ‐ crease the economic scope and synergy between business segments, strengthen the company’s market power, carry out cross ‐subsidies, prevent Dynamic Rela ti onships Management Journal, Vol. 10, No. 2, November 2021 21 predatory pricing, increase purchases and sales of products between segments, and create barriers to the potential entry of new competitors (Lewellen, 1971; Chan et al., 1989; de Andrés, Fuente, & Velasco, 2017). These benefits likely will be optimized if management is able to allocate re ‐ sources among existing businesses, allowing all segments to operate effectively and efficiently (Gyan, 2017). Nevertheless, diversifica ti on may pose some threats to company performance, including changes in industry ‐specific risk, company size, number of businesses, or levels of relatedness of diversifica ti on (Chang & Howard, 1989). The logical consequence of diversifica ti on is the forma ti on of a new strategic business unit, which can cause the company’s orga ‐ niza ti onal structure to widen. This situa ti on poten ‐ ti ally can engender higher coordina ti on costs and informa ti on asymmetry (Zhou, 2011; Hashai, 2015; Hernández‐Trasobares et al., 2017; Parker ‐Lue & Lieberman, 2020). According to agency theory, the la tt er may even lead to moral hazards and adverse selec ti on (Gomariz & Ballesta, 2014). Another drawback of diversification strategies is that they will complicate coordination measures given the company’s increasingly complex struc ‐ ture, which can result in high information asym ‐ metry (Zhou, 2011; Hashai, 2015). In other words, the multi ‐divisional structure is an inevitable con ‐ sequence when a company opts for a diversifica ‐ tion strategy. Although such separation of structures typically is intended to reduce search and coordination costs in order to optimize mar ‐ ket opportunities (Lien & Li, 2013), they have some detrimental impacts on the firm perfor ‐ mance. These negative outcomes may include complicated transactions, operational complexity, and information asymmetry, all of which will make coordination efforts more difficult (Bushman et al., 2004; Lien & Li, 2013). Given the contradictory perspec ti ves on the in ‐ fluence of diversifica ti on on firm performance, this study proposes the following hypothesis to be tested: H1: Diversifica ti on has a nega ti ve e ffect on firm per ‐ formance. 2.2 CEO Commitment It is suggested that corporate governance prac ‐ ti ces can minimize the adverse e ffects of diversifica ‐ ti on strategies on firm performance (Volkov & Smith, 2015). In a diversified company, there usually is a need to establish separate divisions or strategic business units (SBUs) to handle di fferent segments (Henderson & Fredrickson, 2001). As a result, coor ‐ dina ti on becomes an important issue, especially at the highest level of the decision ‐making process. This process involves the board of directors, also re ‐ ferred to as the top management team, and their decisions in devising strategic policies have an im ‐ pact on the company’s performance (Sirén, 2018). One of the key figures in the top management is the CEO, who plays a strategic role in realizing the vision and mission of the company, cul ti va ti ng val ‐ ues by personally engaging in the development of systems and policies, and ensuring the implemen ‐ ta ti on of these systems and policies (Kerama ti & Azadeh, 2007; Miminoshvili, 2016). Top leaders have the task of formula ti ng strategic policies in response to all situa ti ons that poten ti ally can threaten the company’s opera ti ons. They also have to oversee the alloca ti on of resources, manage informa ti on that is relevant to the company, and resolve any in ‐ ternal conflicts. CEOs need to understand precisely the situa ti on faced by the company using the infor ‐ ma ti on collected and processed by the members of top management (Sirén, 2018). Excellent coordina ‐ ti on among di fferent counterparts therefore is nec ‐ essary to ensure the sa ti sfactory comple ti on of the du ti es. The CEO can carry out the coordina ti on func ti on to overcome coordina ti on problems stemming from the more complex organiza ti onal structure (Chan ‐ dler, 1962). The CEO’s commitment to handling the company’s internal coordina ti on plays a crucial role in increasing firm performance. Furthermore, the collabora ti on or coordina ti on between departments, divisions, strategic business units, and func ti onal areas is an essen ti al determinant of the company’s opera ti onal e ffec ti veness (Cha et al., 2015). How ‐ ever, in reality, the CEO can be preoccupied with other commitments outside the company, which likely will damage the company’s performance (Harymawan, Nasih, Ratri, & Nowland, 2019). Dynamic Rela ti onships Management Journal, Vol. 10, No. 2, November 2021 22 Engelbertha E. Silalahi, Irenius Dwinanto Bimo: Diversifica ti on, CEO Commitment, and Firm Performance It is the responsibility of the CEO as the high ‐ est executive leader in the company to coordinate among the entire top management in managing the company. To do this successfully, the CEO needs to be involved in top management meetings in which the executives exchange information in order to proportion the company’s capital among existing divisions more effectively. The importance of board meetings is evidenced further by the is ‐ suance of Regulation Number 33/POJK.04/2014 concerning the Board of Directors and Board of Commissioners of Issuers or Public Companies by the Indonesian Financial Services Authority. It is evident that top management meetings have re ‐ ceived substantial attention owing to their roles in improving corporate governance. However, the sig ‐ nificance of these coordination meetings, notably those attended by CEOs, has been relatively under ‐ investigated. Therefore, this study explored the ex ‐ tent to which the CEOs’ involvement in such meetings influences firm performance. In line with earlier studies on the effect of corporate gover ‐ nance on firm performance (Liang, Kuo, Chan, & Chen, 2020; Liu, 2019), this study took the view that CEOs’ involvement in top management meet ‐ ings mitigates the negative effect of diversification on firm performance. Based on the preceding argument, this study proposes its second hypothesis: H2: The rela ti onship between diversifica ti on and firm performance differs between companies with high CEO commitment and those with low CEO com ‐ mitment. 3 METHODOLOGY The purposive sampling method was used to derive the required data, which consisted of a list of manufacturing companies obtained from the In ‐ donesia Stock Exchange (IDX). A total of 76 firms, complemented by 912 firm ‐year observa ti ons col ‐ lected in the balanced panel data set, were selected based on the period from 2007 to 2018 during which the firms were registered. The sample was limited only to companies that published their an ‐ nual reports and audited financial reports. These manufacturing companies operate in var ‐ ious sectors, such as basic industry, chemical indus ‐ try, miscellaneous industry, and consumer goods industry. The selec ti on of the manufacturing sector in this study was per ti nent because of its significant contribu ti on to the Indonesian economy. The man ‐ ufacturing sector has the greatest number of com ‐ panies registered on the IDX, and the sector’s market capitaliza ti on is larger than that of other sec ‐ tors. Given its prominence, it is important to study the influence of corporate strategies and the role of management in improving company performance in this sector. Firm performance was measured using T obin’s Q, which was calculated with the equa ti on from Kang, Anderson, Eom, & Kang (2017). Tobin’s Q is equal to the sum of the book value of debt and market value of equity divided by the book value of assets ( ). To assess the degree of diversifica ti ons in a com ‐ pany, three main diversifica ti on measures are used, namely entropy, the Herfindahl index, and the num ‐ ber of segments (George & Kabir, 2012; Lien & Li, 2013; Chan et al., 2019). The entropy method (EN ‐ TROPY) was developed by Jacquemin & Berry (1979) with the equa ti on This index indicates that the greater the value of DT , the higher is the level of diversifica ti on. Second, the Herfind ‐ ahl index is calculated using the equa ti on formulated by Hirschman (1964): . If the Herfindahl index (HHi) approaches 1, the com ‐ pany is said to be more concentrated, whereas if the index approaches 0, the company is said to be more diversified. The third measure of diversifica ti on is the logarithm of the number of segments (SEG). A larger number of segments denotes a higher degree of diversifica ti on in a company. CEO commitment as a modera ti ng variable is subject to the number of mee ti ngs a tt ended by the CEO (CEOMEET), es ti mated by the natural logarithm of the number of top management mee ti ngs at ‐ tended by the CEO. The use of proxies is grounded in the no ti on that coordina ti on is an essen ti al deter ‐ minant in increasing the opera ti onal e ffec ti veness of the company (Cha et al., 2015), implying that if the CEO is not commi tt ed to being involved person ‐ Dynamic Rela ti onships Management Journal, Vol. 10, No. 2, November 2021 23 ally in the coordina ti on e fforts, firm performance will be a ffected nega ti vely (Kerama ti & Azadeh, 2007; Harymawan et al., 2019). Other variables were assessed in this study. One variable was company size, which was mea ‐ sured based on the logarithm of stock market value (Randøy & Nielsen, 2002). The value indicates that the greater the stock capitaliza ti on, the higher is the firm performance. Another variable examined was the number of years the company was listed on the stock exchange (AGE), because older companies might have lower firm performance (George & Kabir, 2012). Also taken into account was the report ‐ ing of loss (LOSS), using binary numbers, with 1 de ‐ no ti ng the presence of loss reports and 0 otherwise. A company that reports a loss tends to have lower performance. The final variable was leverage (LEV), which is the total debt divided by the total assets (George & Kabir, 2012). A high value of leverage in ‐ dicates a higher level of performance. Considering all variables, the hypothesis tes ti ng used the follow ‐ ing model: In summary, the dependent variable of com ‐ pany performance was measured using Tobin’s Q, whereas the independent variable was the diversifi ‐ ca ti on strategy (DIV), which was examined with three widely used measures in diversifica ti on studies (entropy, the Herfindahl index, and the number of segments). The modera ti ng variable of CEO commit ‐ ment (CEOMEET) was assessed using the natural log ‐ arithm of the number of mee ti ngs a tt ended by the CEO. Other variables included company size, which was based on the natural logarithm of the market value of company shares (r); company age, which was based on the number of years the company had been listed on the stock exchange (AGE); the report ‐ ing of loss (LOSS); and the value of leverage (LEV). 4 RESULTS 4.1 Descrip ti ve Sta ti s ti cs and Variable Correla ti ons Winsoriza ti on was performed to treat the out ‐ lier data based on the average value criteria plus or minus a standard devia ti on of 2. A normality test was conducted using the skewness value, with a value between 2 and −2 indica ti ng that the data were normally distributed. The descrip ti ve sta ti s ti cs of each variable are presented in Table 1. Table 1: Descrip ti ve sta ti s ti cs The average TOBINSQ was 1.1696, meaning that the debt value and market value of the companies’ shares was 1.696 ti mes the total assets owned. The level of diversifica ti on was ENTROPY = 0.461 and HHi = 0.710, indica ti ng that the diversifica ti on level was not too high. This finding is supported further by the low average number of segments, 2.794; the maxi ‐ mum number of segments was 10. The average CEO a tt endance at top management mee ti ngs (CEOMEET) was 16.21272 (log 7.265) mee ti ngs/year. The maxi ‐ mum number of mee ti ngs a tt ended by the CEO in a year was 72, and the minimum was 2. In addi ti on, companies that reported losses (not reported in Table 1) accounted for 16% of the total observa ti ons. There was a strong correla ti on between the variables used to measure diversifica ti on (EN ‐ TROPY, HHi, and SEG) and company performance Variable Max Min Mean SD N Skew TOBINSQ 5.680 0.600 1.696 1.353 912 1.784 ENTROPY 1.739 0 0.461 0.425 912 0.582 HHi 1 0 0.710 0.261 912 ‐0.434 SEG 10 1 2.794 1.570 912 1.273 CEOMEET 4.277 0.693 2.589 0.621 912 0.022 SIZE 33.941 18.380 27.813 2.311 912 0.100 AGE 3.611 1.386 2.919 0.404 912 ‐1.112 LEV 1.278 0.132 0.525 0.269 912 0.820 LOSS 0 = 84% 1 = 16% TOBINSQ it = company performance, total debt, and market capitaliza ti on scaled by total assets of company i in year t; DIV it = diversifica ti on of company i in year t (ENTROPY , HHI, and SEG); CEOMEET it = natural logarithm of the number of mee ti ngs a tt ended by the CEO of company i in year t; SIZE it = company size in the form of the natural logarithm of the market value of company i shares in year t; AGE it = company age, i.e., the number of years company i had been listed on the stock exchange as of year t; LOSS it = dummy variable: 1 if company i in year t reports a loss, and 0 otherwise; and LEV it = leverage, i.e., total debt divided by total assets of company i in year t. Dynamic Rela ti onships Management Journal, Vol. 10, No. 2, November 2021 24 Engelbertha E. Silalahi, Irenius Dwinanto Bimo: Diversifica ti on, CEO Commitment, and Firm Performance (Table 2). It is clear that diversifica ti on had a signifi ‐ cant nega ti ve correla ti on with TOBINSQ. A strong correla ti on was observed between HHi and SEG with ENTROPY, but because these two variables were independent of each other in the three mod ‐ els, they were not part of the correla ti onal analysis in this study. Furthermore, CEOMEET was found to have a posi ti ve correla ti on with TOBINSQ, corre ‐ sponding to the variables of company size and com ‐ pany age, which also had a posi ti ve correla ti on with TOBINSQ. 4.2 Hypothesis Tes ti ng Hypothesis testing in this study used panel data regression with a balanced panel. The Chow test, Breusch–Pagan Lagrange multiplier, and the Hausman test show how the data were processed using panel data with a random ‐effects regression model. Due to the problem of autocorrelation, ob ‐ taining a variant of constant error required a ro ‐ bust function in the statistical software STATA version 14. Table 3 displays the results of the panel data regression test. Company diversifica ‐ tion had a negative effect on firm performance in all measurement models of diversification (en ‐ tropy, Herfindahl index, and the number of seg ‐ ments) with a significance level of 0.05 ( α = 0.05). This supports the notion that higher levels of di ‐ versification correlate with lower levels of firm performance. The number of CEO meetings (CEOMEET) was found to moderate the effect of diversification on firm performance in all size models of diversifica ‐ tion: ENTROPY*CEOMEET and HHi*CEOMEET at α = 0.01, and HHI*CEOMEET at α = 0.10. The effect of diversification on firm performance in compa ‐ nies with high rates of CEO attendance at top man ‐ agement meetings was different from that on those with low rates of CEO attendance. The em ‐ pirical evidence shows how the presence of the CEO at the board of directors meeting can mitigate the negative effect of diversification on company performance. From the internal capital market approach (Volkov & Smith, 2015), the nega ti ve e ffect of diver ‐ sifica ti on on company performance is a tt ributed to the company’s reliance on internal capital, which in turn reduces the supervision from external capital providers. This condi ti on results in ine fficient use of internal capital. As a consequence, the companies cannot op ti mize the use of corporate resources, whether tangible or intangible, when running di ffer ‐ ent business lines. In contrast, collec ti ve diversifica ‐ ti on may allow companies to produce various products or services more op ti mally. Regarding the CEO role, the results were con ‐ sistent with those of previous studies that scru ti ‐ nized CEO contribu ti on to improving company performance (Fang, Wade, Delios, & Beamish, 2007). These findings support the argument that TOBINSQ ENTROPY HHI SEG CEOMEET SIZE AGE LOSS LEV TOBINSQ 1.000 ENTROPY −0.103* 1.000 HHi −0.035 −0.848* 1.000 SEG −0.121* 0.731* −0.550* 1.000 CEOMEET 0.005 0.110* −0.095* 0.033 1.000 SIZE 0.503* 0.098* −0.132* 0.164* 0.067* 1.000 AGE 0.226* −0.130* 0.076* −0.100* 0.033 0.320* 1.000 LOSS −0.054 −0.135* 0.157* −0.119* −0.042 −0.221 −0.049 1.000 LEV 0.001 −0.131* 0.132* −0.033 −0.034 −0.281 −0.080* 0.337* 1.000 Note: See Table 1 for variable defini ti ons. * denotes 5% significance level Table 2: Correla ti on coe fficients between variables Dynamic Rela ti onships Management Journal, Vol. 10, No. 2, November 2021 25 the coordina ti on func ti on performed by the CEO can indeed mi ti gate the adverse e ffects of informa ‐ ti on asymmetry caused by diversifica ti on strategies (Chandler, 1962). The coordina ti on between SBUs can increase the e ffec ti veness of company manage ‐ ment (Cha et al., 2015), and in the case of a direct rela ti onship, the CEO’s commitment to ac ti vely par ‐ ti cipate in coordina ti on ac ti vi ti es through board mee ti ngs can increase the company’s performance (Harymawan et al., 2019). The empirical evidence shows that CEO commit ‐ ment is a cri ti cal factor in improving company perfor ‐ mance. Top leaders play an essen ti al role in designing strategic policies, managing conflicts, making deci ‐ sions to respond to changing business environments, and implemen ti ng diversifica ti on strategies. He high commitment can enhance the e ffec ti veness of coor ‐ dina ti on between departments, divisions, SBUs, and the func ti onal areas (Cha et al., 2015). 4.3 Addi ti onal Analysis Additional testing studied the effect of diver ‐ sification on company performance in companies with a high diversification level. In the model, a value of 1 represents companies with diversifica ‐ tion values above the average level of diversifica ‐ tion for all the observed companies, and 0 represents otherwise. The diversification vari ‐ ables (ENTROPY , HHi, and SEG) were multiplied by the dummy variable to determine which compa ‐ nies had diversification levels above the average value. At the 5% significance level in all measure ‐ ment models (ENTROPY , HHi, and SEG), high diver ‐ sification had a negative effect on company performance (Table 4), confirming the first hy ‐ pothesis (H1). Clearly, companies with a high level of diversification tend to have low performance. Table 3: E ffect of diversifica ti on on firm performance Variable Dependent variable: TOBINSQ Coe fficient P ‐value Coe fficient P ‐value Coe fficient P ‐value C 0.540 0.020** 0.870 0.000*** 1.255 0.000*** ENTROPY −1.440 0.000*** HHi 1.808 0.015** SEG ‐0.209 0.019** CEOMEET −0.374 0.001*** 0.224 0.111 ‐0.345 0.010*** ENTROPY*CEOMEET 0.458 0.002** HHi*CEOMEET −0.585 0.015** SEG*CEOMEET 0.057 0.0705* SIZE 0.367 0.000*** 0.368 0.000*** 0.369 0.000*** AGE −0.120 0.278 −0.114 0.000*** ‐0.111 0.299 LOSS 0.064 0.291 0.063 0.296 0.062 0.302 LEV 1.116 0.000*** 1.141 0.000*** 1.148 0.000*** R 2 0.278 0.270 0.283 PROB > CHI 2 0.000 0.000 0.000 N 912 912 912 Note: See Table 1 for variable defini ti ons. *, **, and *** denote significance at α = 10, 5, and 1 percent, respec ti vely (one ‐tailed) Dynamic Rela ti onships Management Journal, Vol. 10, No. 2, November 2021 26 Engelbertha E. Silalahi, Irenius Dwinanto Bimo: Diversifica ti on, CEO Commitment, and Firm Performance In the analysis of the effect of CEO commitment on the relationship between diversification and company performance in companies with a high diversification level, the results also were consis ‐ tent with the second hypothesis, testing the three diversification measures. High CEO commitment can mitigate the adverse effects of diversification on a company’s performance despite its high di ‐ versification levels. 5 DISCUSSION AND CONCLUSION 5.1 Theore ti cal Contribu ti ons This study makes several theoretical contribu ‐ tions to the study of strategic management. First, this study provides more insights into the effect of diversification strategies on firm performance from the agency theory perspective (Zhou, 2011; Hernández ‐Trasobares & Galve‐Górriz, 2017). In particular, the findings show that diversification tends to harm corporate performance as tested in all measurement models (entropy index, Herfind ‐ ahl index, and a number of segments). The higher the level of diversification, the more likely it is that companies will have higher information asymme ‐ try and more ‐complex coordination efforts, thereby reducing firm performance. Diversifica ‐ tion leads companies to create SBUs to manage a new business or manufacture new products, re ‐ sulting in a wider organizational structure. As a consequence, business operations and informa ‐ tion flows become increasingly more complex, which is likely to cause high information asymme ‐ try, moral hazard, and adverse selection. Second, when the effect of CEO commitment is considered, it is evident that frequent atten ‐ dance of the CEO at top management meetings can attenuate the negative impact of diversifica ‐ tion on company performance. Effective coordina ‐ tion between SBUs can mitigate information asymmetry and improve operational quality (Cha et al., 2015). These coordination efforts can en ‐ Table 4: Addi ti onal te ti ng based on diversifica ti on above sample average value Variable Dependent variable: TOBINSQ Coe fficient P ‐value Coe fficient P ‐value Coe fficient P ‐value C 1.087 0.000*** 0.979 0.000*** 1.195 0.000 *** HIGH_ENTROPY −0.256 0.045** HIGH_HHI 0.211 0.025** HIGH_SEG ‐0.232 0.037** CEOMEET −0.286 0.003*** −0.065 0.158 ‐0.299 0.007*** HIGH_ENTROPY*CEOME ET 0.248 0.008*** HIG_HHI*CEOMEET −0.232 0.014** HIG_SEG*CEOMEET 0.234 0.014** SIZE 0.366 0.000*** 0.365 0.000*** 0.373 0.000*** AGE −0.118 0.282 −0.122 0.274 ‐0.139 0.259 LOSS 0.064 0.294 0.054 0.323 0.079 0.323 LEV 1.132 0.000*** 1.130 0.000*** 1.147 0.000*** R 2 0.280 0.271 0.278 PROB > CHI 2 0.000 0.000 0.000 N 912 912 912 Note: See Table 1 for variable defini ti ons. *, **, and *** denote significance at α = 10, 5, and 1 percent, respec ti vely (one‐tailed) Dynamic Rela ti onships Management Journal, Vol. 10, No. 2, November 2021 27 courage more ‐effective and ‐efficient allocation of resources, create a more transparent and reliable flow of information, and reduce internal conflicts as each unit has its internal targets to achieve. Cor ‐ respondingly, to enhance the company’s perfor ‐ mance, the presence of the CEO at coordination meetings of the board of directors becomes of considerable importance. These meetings can serve as the venue in which relevant information is coordinated and exchanged among the top man ‐ agement members, encouraging effective alloca ‐ tion of the company’s resources across different divisions. Another contribu ti on of empirical nature of this study is its research methodology. Based on the panel data regression analysis (i.e., balanced panel), the results are consistent in both the full sample and the specific samples of companies whose levels of diversifica ti on are either above or below the aver ‐ age level. 5.2 Prac ti cal Implica ti ons Regarding prac ti cal contribu ti ons to the field of strategic management, this study provides prac ti ‐ ti oners with insights essen ti al to the implementa ‐ ti on of diversifica ti on. Although diversifica ti on strategies can be beneficial to the improvement of company performance, they s ti ll pose poten ti al risks. The varied range of control resul ti ng from di ‐ versifica ti on prac ti ces requires an e ffec ti ve control mechanism to mi ti gate any moral hazard and ad ‐ verse selec ti on in the management of strategic busi ‐ ness units. Op ti mal economies of scale from sharing resources, if not u ti lized properly, will have a nega ‐ ti ve impact on company performance. Therefore, an excellent managerial capability is needed in the management of sharing resources in a diversified company so that economies of scale can be achieved to the utmost extent. Another implication is that in companies using diversification strategies, there is an increas ‐ ing need for systematic coordination among the top management to improve firm performance. The coordination between different departments, divisions, and SBUs has been shown to contribute to operational effectiveness and to anticipate in ‐ formation asymmetry, both of which can lead to better firm performance. Moreover, as one of the primary leaders, the CEO is expected to be in ‐ volved in the coordination process by regularly at ‐ tending high ‐stakes meetings. By doing so, the CEO actually demonstrates strong commitment to the tasks, which can mitigate any possible unde ‐ sirable effects on company performance. Top management leadership in coordination efforts is an essential factor determining the effectiveness of a company’s strategy. It is a key component of the success of any strategies adopted to improve firm performance. 5.3 Limita ti ons and future research Nonetheless, there are some limitations to this study that were not addressed. Firstly, when exploring the issue of diversification and firm performance, future researchers can examine several aspects that this study did not consider. One aspect is the nonlinear effect of diversifica ‐ tion on company performance, which is said to be present in the relationship between the two variables (Palich et al., 2000). In relation to CEO commitment, the influence of share ownership also can be considered as one of the control vari ‐ ables in future studies. The last limitation is that the hypothesis testing was carried out using panel data regression. Future research can con ‐ sider using a structural equation model to test the relationship between the variables simulta ‐ neously. Dynamic Rela ti onships Management Journal, Vol. 10, No. 2, November 2021 28 Engelbertha E. Silalahi, Irenius Dwinanto Bimo: Diversifica ti on, CEO Commitment, and Firm Performance REFERENCES Anso ff, H.I. (1957). Strategies for diversifica ti on. Harvard business review, 35(5), 113 ‐124. 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