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

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Listed author(s):
  • 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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File URL: http://links.jstor.org/sici?sici=0741-6261%28199723%2928%3A3%3C489%3AFDACCM%3E2.0.CO%3B2-V&origin=repec
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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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Find related papers by JEL classification:
  • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
  • G3 - Financial Economics - - Corporate Finance and Governance

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  1. Sherwin Rosen, 1990. "Contracts and the Market for Executives," NBER Working Papers 3542, National Bureau of Economic Research, Inc.
  2. Baker, George P & Jensen, Michael C & Murphy, Kevin J, 1988. " Compensation and Incentives: Practice vs. Theory," Journal of Finance, American Finance Association, vol. 43(3), pages 593-616, July.
  3. Shleifer, Andrei & Vishny, Robert W., 1989. "Management entrenchment : The case of manager-specific investments," Journal of Financial Economics, Elsevier, vol. 25(1), pages 123-139, November.
  4. Benjamin E. Hermalin and Michael L. Katz., 1994. "Corporate Diversification and Agency," Economics Working Papers 94-227, University of California at Berkeley.
  5. Joskow, Paul L. & Rose, Nancy L. & Shepard, Andrea., 1993. "Regulatory constraints on executive compensation," Working papers 3550-93., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  6. Morck, Randall & Shleifer, Andrei & Vishny, Robert W, 1990. " Do Managerial Objectives Drive Bad Acquisitions?," Journal of Finance, American Finance Association, vol. 45(1), pages 31-48, March.
  7. Yakov Amihud & Baruch Lev, 1981. "Risk Reduction as a Managerial Motive for Conglomerate Mergers," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 605-617, Autumn.
  8. John G. Matsusaka, 1993. "Takeover Motives during the Conglomerate Merger Wave," RAND Journal of Economics, The RAND Corporation, vol. 24(3), pages 357-379, Autumn.
  9. Gollop, Frank M & Monahan, James L, 1991. "A Generalized Index of Diversification: Trends in U.S. Manufacturing," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 318-330, May.
  10. Lichtenberg, Frank R, 1991. "The Managerial Response to Regulation of Financial Reporting for Segments of a Business Enterprise," Journal of Regulatory Economics, Springer, vol. 3(3), pages 241-249, September.
  11. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-264, April.
  12. Roll, Richard, 1986. "The Hubris Hypothesis of Corporate Takeovers," The Journal of Business, University of Chicago Press, vol. 59(2), pages 197-216, April.
  13. 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 1248-1280, December.
  14. Michael Waldman, 1984. "Worker Allocation, Hierarchies and the Wage Distribution," Review of Economic Studies, Oxford University Press, vol. 51(1), pages 95-109.
  15. Cynthia A. Montgomery & Birger Wernerfelt, 1988. "Diversification, Ricardian Rents, and Tobin's q," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 623-632, Winter.
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