Spillovers inside Conglomerates: Incentives and Capital

68 Pages Posted: 25 Jun 2014 Last revised: 10 Sep 2016

See all articles by Ran Duchin

Ran Duchin

University of Washington - Michael G. Foster School of Business

Amir Goldberg

Stanford Graduate School of Business

Denis Sosyura

Arizona State University

Date Written: September 9, 2016

Abstract

Using hand-collected data on divisional managers at conglomerates, we find that a change in industry surplus in one division generates large spillovers on managerial payoffs in other divisions of the same firm. These spillovers arise only within the boundaries of a conglomerate but not between standalone firms that match conglomerates’ divisions. 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 shareholder governance. These spillovers are associated with weaker performance and lower firm value. Our evidence is consistent with simultaneous cross-subsidization via managerial payoffs and capital budgets and suggests that these practices arise in similar firms.

Keywords: diversification, conglomerates, social networks, executive compensation, agency, pay equity

JEL Classification: G31, G32

Suggested Citation

Duchin, Ran and Goldberg, Amir and Sosyura, Denis, Spillovers inside Conglomerates: Incentives and Capital (September 9, 2016). Review of Financial Studies, Forthcoming; Stanford University Graduate School of Business Research Paper No. 14-22. Available at SSRN: https://ssrn.com/abstract=2458412 or http://dx.doi.org/10.2139/ssrn.2458412

Ran Duchin (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Amir Goldberg

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Denis Sosyura

Arizona State University ( email )

Tempe, AZ 85287-3706
United States

HOME PAGE: http://www.public.asu.edu/~dsosyura/

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