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

RAND J. OF ECONOMICS, Vol. 28 No. 3

Posted: 7 Jul 1997

See all articles by Nancy L. Rose

Nancy L. Rose

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Andrea Shepard

Independent

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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.

JEL Classification: G39, J33

Suggested Citation

Rose, Nancy L. and Shepard, Andrea, Firm Diversification and CEO Compensation: Managerial Ability or Executive Entrenchment?. RAND J. OF ECONOMICS, Vol. 28 No. 3, Available at SSRN: https://ssrn.com/abstract=8403

Nancy L. Rose

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
Room E52-318A
Cambridge, MA 02142
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Andrea Shepard (Contact Author)

Independent

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