Pay-for-Performance and Firm Diversification
37 Pages Posted: 2 Jun 1997
Date Written: March 1997
Abstract
We find that CEO compensation is less sensitive to stock-price performance the greater the extent of firm diversification. Our empirical evidence is consistent with a theory of managerial entrenchment as well as with a theory of optimal contracting between shareholders and managers. To distinguish between the theories we examine the association between firm value and the structure of the compensation contract along with the use of alternative governance mechanisms in diversified firms. We find only a weak relation between the sensitivity of compensation to stock-price performance and the size of the value loss from diversification. Moreover, we find that the use of alternative governance mechanisms is not suppressed in diversified firms. Our results appear to be more consistent with optimal contracting, and suggest that the existence and magnitude of the diversification discount cannot be attributed to agency problems between managers and shareholders.
JEL Classification: G30, G32, J44
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Are CEOS Really Paid Like Bureaucrats?
By Brian J. Hall and Jeffrey B. Liebman
-
Are CEOS Really Paid Like Bureaucrats?
By Brian J. Hall and Jeffrey B. Liebman
-
The Other Side of the Tradeoff: The Impact of Risk on Executive Compensation
-
Good Timing: CEO Stock Option Awards and Company News Announcements
-
Good Timing: CEO Stock Option Awards and Company News Announcements
-
The Use of Equity Grants to Manage Optimal Equity Incentive Levels
By John E. Core and Wayne R. Guay
-
The Other Side of the Tradeoff: the Impact of Risk on Executive Compensation
-
Stock Options for Undiversified Executives
By Brian J. Hall and Kevin J. Murphy