Convergence of Interests & Managerial Diversification

Abstract

This research intended to spotlight the fundamental tension on corporate governance, to assess the mechanisms’ effectiveness affiliated to governance insider ownership structure under consideration of convergence of interests or managerial diversification theory and financial leverage in controlling principle-agents conflicts. The convergence of interests cites that higher the managerial ownership translating lower the agency cost and higher the firm value. Whereas, as fraction of managerial ownership is extremely high, then significant voting rights & others managerial influences may satisfy the entrenchment hypothesis. This study’s results acknowledge the convergence of interests hypothesis which satisfied the existence of linear relationship under the light of managerial diversification on sample of 41 non-financial firms from four economic groups listed in Pakistan Stock Exchange from the period of 2010-2014. Furthermore, ownership concentration is also shown to impact significantly on agency cost but there is no significant shock on agency cost under the consideration of director’s remuneration.

Keywords: Convergence of interest; Entrenchment; Insider equity ownership; Diversification; Ownership-concentration