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Firm Diversification and CEO Compensation: Managerial Ability or Executive Entrenchment?

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Author Info
Nancy L. Rose
Andrea Shepard
Abstract

Investigating the relationship between CEO compensation and firm diversification over 1985-1990, we find that the CEO of a firm with two lines of business averages 13% more in salary and bonus than the CEO of a similar-sized but undiversified firm, ceteris paribus. We explore two potential explanations for this: the match of higher-ability CEOs with firms that are more difficult to manage, and the association of diversification with CEO entrenchment. The data are more consistent with ability matching: the premium is invariant to CEO tenure, and incumbents who diversify their firms earn less than newly hired CEOs at already-diversified firms.

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Publisher Info
Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 28 (1997)
Issue (Month): 3 (Autumn)
Pages: 489-514
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Handle: RePEc:rje:randje:v:28:y:1997:i:autumn:p:489-514

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  1. Xavier Gabaix & Augustin Landier, 2006. "Why Has CEO Pay Increased So Much?," NBER Working Papers 12365, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Frédéric Perdreau, 2002. "Searching for managerial opportunism faint traces in French diversifying acquisitions," Post-Print halshs-00010010_v1, HAL. [Downloadable!]
  3. Darlene Chisholm, 2004. "Two-Part Share Contracts, Risk, and the Life Cycle of Stars: Some Empirical Results from Motion Picture Contracts," Journal of Cultural Economics, Springer, vol. 28(1), pages 37-56, February. [Downloadable!] (restricted)
  4. Wen-Hsien Tsai & Yi-Chen Kuo & Jung-Hua Hung, 2009. "Corporate diversification and CEO turnover in family businesses: self-entrenchment or risk reduction?," Small Business Economics, Springer, vol. 32(1), pages 57-76, January. [Downloadable!] (restricted)
  5. Aleksandra Gregoric & Sašo Polanec & Sergeja Slapnicar, 2008. "Pay me Right: Reference Values and Executive Compensation," LICOS Discussion Papers 22008, LICOS - Centre for Institutions and Economic Performance, K.U.Leuven. [Downloadable!]
  6. Cerasi, Vittoria & Daltung, Sonja, 2007. "Financial structure, Managerial Compensation and Monitoring," Working Paper Series 207, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
    Other versions:
  7. Bertrand, Marianne & Schoar, Antoinette, 2003. "Managing With Style: The Effect of Managers on Firm Policies," Working papers 4280-02, Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
    Other versions:
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