Spillovers Inside Conglomerates: Incentives and Capital

Using hand-collected data on divisional managers at conglomerates, we find that a change in industry pay in one division generates spillovers on managerial pay in other divisions of the same firm. These spillovers arise only within the boundaries of a conglomerate. The intra-firm spillovers increase...

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Bibliographic Details
Published in:The Review of financial studies 2017-05, Vol.30 (5), p.1696-1743
Main Authors: Duchin, Ran, Goldberg, Amir, Sosyura, Denis
Format: Article
Language:English
Subjects:
Budgets
Capital budgeting
Compensation
Conglomerates
Governance
Incentives
Managers
Studies
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Summary:Using hand-collected data on divisional managers at conglomerates, we find that a change in industry pay in one division generates spillovers on managerial pay in other divisions of the same firm. These spillovers arise only within the boundaries of a conglomerate. The intra-firm spillovers increase when conglomerates have excess cash and when managers have more influence over its distribution, but decline in the presence of strong governance. These spillovers are associated with weaker performance and lower firm value. Our evidence is consistent with simultaneous cross-subsidization via managerial compensation and capital budgets and suggests that these practices arise in similar firms.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhw095