Behind the curtain of international diversification: An agency theory perspective

Research Summary: This article dissects the antecedents of international diversification through the lens of the agency cost of free cash flow arguments. It explores whether the partial convergence of interests among managers, majority shareholders, and minority shareholders affects a firm's choice to diversify internationally. Using a sample panel of 60 Italian firms evaluated longitudinally from 2004 to 2014, the study tests whether a firm's international diversification is affected by its free cash flow (as the ultimate source of managerial discretion) and debt (as the main constraint to managerial discretion), especially in firm contexts that exacerbate agency problems. We find that the effects on international diversification of free cash flow and debt are contingent on ownership concentration, family control, and growth opportunities. Managerial Summary: This article studies the antecedents of international diversification by considering the conflicts of interest among managers, majority shareholders, and minority shareholders. First, it shows that the available cash flow (as the fundamental wellspring of managerial discretion) and level of indebtedness (as a key limitation to managerial discretion) have, respectively, a positive and a negative effect on firms' international diversification. Second, it shows that the effects of cash flow and debt are particularly relevant when considering three factors: (a) the concentration of firm ownership, leading to conflicts of interest between majority and minority shareholders; (b) family control, leading to conflicts of interest between family members and other shareholders; and (c) the potential to exploit growth opportunities, leading to conflicts of interest between managers and shareholders.