Managerial Incentives And Changes In Corporate Focus

Abstract

We examine how Chief Executive Officer (CEO) equity ownership, CEO tenure, and the percentage of options in CEO annual compensation are related to decisions regarding changes in corporate focus. We document that the CEOs whose companies change their level of corporate focus have significant differences from CEOs whose firms do not change focus. However, we find no differences in the characteristics of CEOs who increase their firm’s level of diversification and the CEOs who decrease their firm’s level of diversification. Firm characteristics, such as size or whether the firm sells at a premium or discount to its peers, are better predictors of changes in corporate focus than CEO characteristics. Overall, we find no evidence that changes in diversification are related to self-serving managers attempting to maximize their own wealth.