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The effects of managerial ownership on international and business diversification: Balancing incentives and risks
Author(s) -
Alessandri Todd M.,
Seth Anju
Publication year - 2014
Publication title -
strategic management journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 11.035
H-Index - 286
eISSN - 1097-0266
pISSN - 0143-2095
DOI - 10.1002/smj.2222
Subject(s) - diversification (marketing strategy) , incentive , endogeneity , shareholder , business , international business , industrial organization , accounting , economics , finance , corporate governance , marketing , microeconomics , management , econometrics
Research has examined the effects of managerial share ownership on business diversification, typically from the incentive alignment perspective. Yet, share ownership also shifts risk to managers (the efficient managerial contracting perspective). Furthermore, the effects of managerial ownership on international diversification are unexplored. We examine how managerial ownership influences both international and business diversification in light of the trade‐off between incentive alignment and risk bearing. Based on the differing risk profiles of the two types of diversification, we argue that incentive contracts with higher levels of managerial ownership will be inefficient, i.e., counter to shareholder interests—reducing international diversification and increasing business diversification. Our findings support our arguments for international diversification. We find no significant effect for business diversification after accounting for endogeneity and serial correlation . Copyright © 2013 John Wiley & Sons, Ltd.