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

  • Nancy L. Rose
  • Andrea Shepard

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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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. Lang, Larry H P & Stulz, Rene M, 1994. "Tobin's q, Corporate Diversification, and Firm Performance," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1248-80, December.
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