Why Do Managers Diversify Their Firms?
Agency Reconsidered
Rajesh K. Aggarwal
Amos Tuck School
Dartmouth College
Hanover, NH 03755
[email protected]
(603) 646-2843
Andrew A. Samwick
Department of Economics
Dartmouth College
Hanover, NH 03755
[email protected]
(603) 646-2893
March, 2000
Abstract: The existing agency explanation for corporate diversification is based on the
existence of a diversification discount and a negative relationship between diversification
and managerial ownership. We argue that this explanation is incomplete on both
theoretical and empirical grounds.
We develop a contracting model between
shareholders and managers in which optimal incentive contracts mitigate managers’
propensity to diversify. We derive comparative static predictions for the equilibrium
relationships between incentives, diversification, and firm performance. The model is
consistent with the observed negative relationship between corporate diversification and
firm value. Empirically, we show that the negative relationship that has been observed
between diversification and managerial incentives is the result of omitted variable bias.
When estimated using panel data, higher managerial incentives are associated with
greater diversification. We also find that the link between firm performance and
managerial incentives is weaker for firms that experience changes in diversification than
it is for firms that do not experience changes in diversification. These two findings
provide support for our agency cost explanation for diversification, in which observed
changes in diversification and incentives within firms are equilibrium responses to
changes in the level of benefits that managers derive from diversification.
We thank Sheri Aggarwal, Andrew Bernard, Michael Knetter, Praveen Kopalle, Dominic LaValle, Dennis
Logue, Joel Vanden, and seminar participants at Dartmouth for helpful discussions. We also thank Bob
Burnham for assistance with Compustat and Andy Halula for assistance with the ExecuComp database.
Any errors are our own.
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Kduw/ Rolyhu dqg Mrkq Prruh +4<<8,1 Ghew dqg Vhqlrulw|= Dq Dqdo|vlv ri wkh Uroh ri Kdug
Fodlpv lq Frqvwudlqlqj Pdqdjhphqw1 Dphulfdq Hfrqrplf Uhylhz1 ;8= 89:0;81
Klpphoehuj/ Fkduohv/ U1 Johqq Kxeedug/ dqg Gdulxv Sdold +4<<<,1 Xqghuvwdqglqj wkh
Ghwhuplqdqwv ri Pdqdjhuldo Rzqhuvkls dqg wkh Olqn Ehwzhhq Rzqhuvkls dqg Shuirupdqfh1
Mrxuqdo ri Ilqdqfldo Hfrqrplfv1 86= 6860;71
Kropvwurp/ Ehqjw +4<:<,1 Prudo Kd}dug dqg Revhuydelolw|1 Ehoo Mrxuqdo ri Hfrqrplfv1
43= :70<41
Kropvwurp/ Ehqjw dqg Sdxo Plojurp +4<;:,1 Djjuhjdwlrq dqg Olqhdulw| lq wkh Surylvlrq
ri Lqwhuwhpsrudo Lqfhqwlyhv1 Hfrqrphwulfd1 88= 63605;1
Kxeedug/ U1 Johqq dqg Gdulxv Sdold +4<<<,1 D Uhh{dplqdwlrq ri wkh Frqjorphudwh Phujhu
Zdyh lq wkh 4<93v= Dq Lqwhuqdo Fdslwdo Pdunhwv Ylhz1 Mrxuqdo ri Ilqdqfh1 87= 4464044851
Mhqvhq/ Plfkdho F1 +4<;9,1 Djhqf| Frvwv ri Iuhh Fdvk Iorz/ Frusrudwh Ilqdqfh/ dqg
Wdnhryhuv1 Dphulfdq Hfrqrplf Uhylhz1 :9= 656065<1
Mhqvhq/ Plfkdho F1 +4<<6,1 Wkh Prghuq Lqgxvwuldo Uhyrxwlrq/ H{lw/ dqg wkh Idloxuh ri
Lqwhuqdo Frqwuro V|vwhpv1 Mrxuqdo ri Ilqdqfh1 7;= ;640;;31
63
Mhqvhq/ Plfkdho F1 dqg Zlooldp K1 Phfnolqj +4<:9,1 Wkhru| ri wkh Ilup= Pdqdjhuldo
Ehkdylru/ Djhqf| Frvwv dqg Rzqhuvkls Vwuxfwxuh1 Mrxuqdo ri Ilqdqfldo Hfrqrplfv1 6=
6380931
Mhqvhq/ Plfkdho F1 dqg Nhylq M1 Pxusk| +4<<3,1 Shuirupdqfh Sd| dqg Wrs Pdqdjhphqw
Lqfhqwlyhv1 Mrxuqdo ri Srolwlfdo Hfrqrp|1 <;= 5580971
Mrkq/ Nrvh dqg Hol Rihn +4<<8,1 Dvvhw Vdohv dqg Lqfuhdvh lq Irfxv1 Mrxuqdo ri Ilqdqfldo
Hfrqrplfv1 6:= 4380591
Ndsodq/ Vwhyhq +4<;<,1 Wkh Hhfwv ri Pdqdjhphqw Ex|rxwv rq Rshudwlqj Shuirupdqfh
dqg Ydoxh1 Mrxuqdo ri Ilqdqfldo Hfrqrplfv1 57= 54:05871
Odqj/ Oduu| K1 S1 dqg Uhqh P1 Vwxo} +4<<7,1 Wrelq*v t/ Frusrudwh Glyhuvlfdwlrq/ dqg
Ilup Shuirupdqfh1 Mrxuqdo ri Srolwlfdo Hfrqrp|1 435= 457;0;31
Pd|/ Grq R1 +4<<8,1 Gr Pdqdjhuldo Prwlyhv Lq xhqfh Ilup Ulvn0Uhgxfwlrq VwudwhjlhvB
Mrxuqdo ri Ilqdqfh1 83= 45<40463;1
PfFrqqhoo/ Mrkq M1 dqg Fkulv M1 Pxvfduhood +4<;8,1 Frusrudwh Fdslwdo H{shqglwxuh Ghfl0
vlrqv dqg wkh Pdunhw Ydoxh ri wkh Ilup1 Mrxuqdo ri Ilqdqfldo Hfrqrplfv1 47= 6<<07551
PfFrqqhoo/ Mrkq M1 dqg Khqul Vhuydhv +4<<3,1 Dgglwlrqdo Hylghqfh rq Htxlw| Rzqhuvkls
dqg Frusrudwh Ydoxh1 Mrxuqdo ri Ilqdqfldo Hfrqrplfv1 5:= 8<809451
Prufn/ Udqgdoo/ Dqguhl Vkohlihu/ dqg Urehuw Ylvkq| +4<;;,1 Pdqdjhphqw Rzqhuvkls dqg
Pdunhw YdoxdwlrqDq Hpslulfdo Dqdo|vlv1 Mrxuqdo ri Ilqdqfldo Hfrqrplfv1 53= 5<606481
Pxusk|/ Nhylq M1 +4<<<,1 H{hfxwlyh Frpshqvdwlrq/ lq Ruoh| Dvkhqihowhu dqg Gdylg Fdug
+hgv1, Kdqgerrn ri Oderu Hfrqrplfv Yro1 6/ Qruwk Kroodqg1
Udmdq/ Udjkxudp J1/ Khqul Vhuydhv/ dqg Oxljl ]lqjdohv +5333,1 Wkh Frvw ri Glyhuvlw|=
Wkh Glyhuvlfdwlrq Glvfrxqw dqg Lqh!flhqw Lqyhvwphqw1 Mrxuqdo ri Ilqdqfh/ iruwkfrplqj1
Vhuydhv/ Khqul +4<<9,1 Wkh Ydoxh ri Glyhuvlfdwlrq Gxulqj wkh Frqjorphudwh Phujhu
Zdyh1 Mrxuqdo ri Ilqdqfh1 84= 4534045581
Vkohlihu/ Dqguhl dqg Urehuw Ylvkq| +4<;<,1 Pdqdjhphqw HqwuhqfkphqwWkh Fdvh ri
Pdqdjhu0Vshflf Lqyhvwphqwv1 Mrxuqdo ri Ilqdqfldo Hfrqrplfv1 58= 456046<1
Vkohlihu/ Dqguhl dqg Urehuw Ylvkq| +4<<:,1 D Vxuyh| ri Frusrudwh Jryhuqdqfh1 Mrxuqdo
ri Ilqdqfh1 85= :6:0;61
Vwxo}/ Uhqh P1 +4<<3,1 Pdqdjhuldo Glvfuhwlrq dqg Rswlpdo Ilqdqflqj Srolflhv1 Mrxuqdo
ri Ilqdqfldo Hfrqrplfv1 59= 605:1
Vwdqgdug dqg Srru*v +4<<8,1 V)S Frpsxvwdw H{hfxFrps= Wkh H{hfxwlyh Frpshqvdwlrq
Gdwdedvh1 Hqjohzrrg/ FR= PfJudz0Kloo/ Qryhpehu1
Vwhlq/ Mhuhp| F1 +4<<:,1 Lqwhuqdo Fdslwdo Pdunhwv dqg wkh Frpshwlwlrq iru Frusrudwh
Uhvrxufhv1 Mrxuqdo ri Ilqdqfh1 85= 44404661
64
Table 1
Descriptive Statistics for Variables Used in Econometric Analyses
Variable
Team PPS
CEO PPS
Tobin’s Q
No. of Segments
No. of 4-digit SICs
No. of 2-digit SICs
Investment/Capital
Dividend Yield
Ln(sales)
Capital/Sales
Cash Flow/Capital
Debt/Assets
Std Dev of Returns
R & D/Capital
Advertising/Capital
Number of
Observations
7045
7045
7045
7045
7045
7045
7045
7045
7045
7045
7045
7015
6814
3815
1567
Mean
Standard
Deviation
10th
Percentile
25th
Percentile
7.1269
4.1565
2.1397
2.1796
1.7918
1.5517
0.2543
1.4928
7.0342
0.5385
0.8628
0.2338
669.65
0.3989
0.3216
10.7508
7.3757
2.1263
1.8230
1.2110
0.9517
0.1731
2.1584
1.5832
0.8911
2.7421
0.1818
1491.69
1.3003
0.8444
0.4491
0.1550
1.0666
1.0000
1.0000
1.0000
0.0845
0.0000
5.1308
0.0703
0.1471
0.0033
61.70
0.0000
0.0226
1.1308
0.4583
1.2479
1.0000
1.0000
1.0000
0.1377
0.0000
6.0369
0.1318
0.2461
0.0828
106.20
0.0120
0.0498
Median
75th
Percentile
90th
Percentile
3.1259
1.3371
1.6002
1.0000
1.0000
1.0000
0.2106
0.8700
6.9847
0.2573
0.4941
0.2236
235.82
0.0935
0.1219
7.1269
3.9261
2.3375
3.0000
2.0000
2.0000
0.3308
2.3500
8.0879
0.5576
0.9321
0.3472
601.38
0.3647
0.3226
19.4998
11.8047
3.6263
4.0000
3.0000
3.0000
0.4815
4.0200
9.0983
1.4390
1.8251
0.4461
1393.56
0.9758
0.6579
Notes:
1) Pay-performance sensitivities (PPS) represent incentives provided by direct ownership of stock and stock options for each top
management team or chief executive officer (CEO). They are expressed as percentages of the firm, from 0 to 100.
2) Pay-performance sensitivities are calculated from ExecuComp. The standard deviation of monthly returns is based on dollar
returns calculated from CRSP, expressed in millions. All other variables are calculated from Compustat.
3) The PPS for the top management team includes the PPS for the CEO plus four times the average PPS for all other executives for
whom data are available.
4) All dollar values are in millions of constant 1997 dollars.
5) The sample is comprised of 1602 firms observed in any year from 1993 to 1998.
32
Table 2
Regressions of Tobin’s Q on Top Management Incentives and Diversification
Variable
Intercept
No. of 4-digit SICs
PPS
OLS
2.2090
(0.1719)
-0.2022
(0.0211)
0.0384
(0.0196)
Fixed Effect
2.1427
(0.0575)
-0.0446
(0.0177)
0.0193
(0.0041)
-0.2382
(0.0601)
-0.1236
(0.0622)
-0.0650
(0.0632)
0.1564
(0.0748)
0.2976
(0.0957)
0.0654
-0.1837
(0.0380)
-0.0886
(0.0371)
-0.0702
(0.0375)
-0.0078
(0.0406)
-0.0166
(0.0473)
0.8611
Investment
Dividend Yield
Ln(sales)
Ln(sales)2
Capital/Sales
(Capital/Sales)2
Cash Flow/Capital
Debt/Assets
Missing D/A
CDF of Std Dev
Missing Std Dev
R & D/Capital
Missing R&D/K
Advertising/Capital
Missing Adv/K
Year = 1994
Year = 1995
Year = 1996
Year = 1997
Year = 1998
OLS w/Controls
5.2739
(0.8673)
-0.0641
(0.0125)
0.0288
(0.0201)
2.3904
(0.4431)
0.0330
(0.0223)
-0.9811
(0.2226)
0.0391
(0.0145)
-0.1930
(0.0529)
-0.0008
(0.0025)
0.0191
(0.0215)
-0.8397
(0.1645)
0.7094
(0.4301)
2.6836
(0.2119)
1.9313
(0.4918)
-0.0065
(0.0632)
-0.1534
(0.0523)
0.0956
(0.1698)
-0.1173
(0.0569)
-0.2223
(0.0525)
-0.0982
(0.0540)
-0.0538
(0.0552)
0.1114
(0.0664)
0.1640
(0.0960)
0.2322
FE w/Controls
5.1538
(1.2811)
-0.0680
(0.0196)
0.0143
(0.0035)
0.9827
(0.1768)
-0.0227
(0.0169)
-0.9344
(0.3319)
0.0806
(0.0227)
-0.2897
(0.0694)
0.0047
(0.0024)
0.0729
(0.0225)
-0.9099
(0.1753)
-0.6667
(0.4954)
-0.9533
(0.2812)
-0.3441
(0.2993)
0.0418
(0.0343)
0.0551
(0.0904)
-0.2123
(0.0763)
-0.0170
(0.0587)
-0.1786
(0.0379)
-0.0781
(0.0413)
-0.0497
(0.0449)
0.0254
(0.0558)
0.0676
(0.0527)
0.8689
R-squared
Notes:
1) Each regression pertains to our sample of 1602 firms and 7045 firm-years.
2) The Fixed Effects specification includes a dummy variable for each sample firm.
3) Heteroskedasticity-robust standard errors are reported in parentheses beneath each coefficient.
33
Table 3
Regressions of Tobin’s Q on CEO Incentives and Diversification
Variable
Intercept
No. of 4-digit SICs
PPS
OLS
2.3856
(0.0654)
-0.2252
(0.0128)
0.0332
(0.0091)
Fixed Effect
2.2385
(0.0515)
-0.0411
(0.0177)
0.0115
(0.0045)
-0.2372
(0.0596)
-0.1219
(0.0621)
-0.0683
(0.0632)
0.1537
(0.0748)
0.3025
(0.1025)
0.0415
-0.1902
(0.0385)
-0.0975
(0.0377)
-0.0827
(0.0382)
-0.0240
(0.0414)
-0.0404
(0.0486)
0.8605
Investment
Dividend Yield
Ln(sales)
Ln(sales)2
Capital/Sales
(Capital/Sales)2
Cash Flow/Capital
Debt/Assets
Missing D/A
CDF of Std Dev
Missing Std Dev
R & D/Capital
Missing R&D/K
Advertising/Capital
Missing Adv/K
Year = 1994
Year = 1995
Year = 1996
Year = 1997
Year = 1998
OLS w/Controls
5.7443
(0.8573)
-0.0656
(0.0116)
0.0180
(0.0072)
2.4840
(0.5156)
0.0244
(0.0150)
-1.0341
(0.2393)
0.0409
(0.0150)
-0.2342
(0.0363)
0.0003
(0.0021)
0.0139
(0.0247)
-0.8806
(0.1595)
0.7006
(0.4439)
2.6208
(0.1785)
1.9073
(0.4933)
-0.0268
(0.0718)
-0.1170
(0.0362)
0.1464
(0.2041)
-0.1316
(0.0532)
-0.2266
(0.0518)
-0.1011
(0.0533)
-0.0593
(0.0543)
0.1054
(0.0655)
0.1642
(0.0997)
0.2178
FE w/Controls
5.4209
(1.2894)
-0.0645
(0.0196)
0.0058
(0.0043)
1.0061
(0.1783)
-0.0236
(0.0173)
-0.9704
(0.3339)
0.0818
(0.0228)
-0.3016
(0.0698)
0.0050
(0.0024)
0.0724
(0.0229)
-0.9048
(0.1748)
-0.6687
(0.4931)
-0.9701
(0.2830)
-0.3499
(0.3028)
0.0411
(0.0347)
0.0640
(0.0909)
-0.2038
(0.0771)
-0.0159
(0.0590)
-0.1818
(0.0381)
-0.0818
(0.0415)
-0.0547
(0.0451)
0.0188
(0.0560)
0.0566
(0.0530)
0.8685
R-squared
Notes:
1) Each regression pertains to our sample of 1602 firms and 7045 firm-years.
2) The Fixed Effects specification includes a dummy variable for each sample firm.
3) Heteroskedasticity-robust standard errors are reported in parentheses beneath each coefficient.
34
Table 4
Regressions of Diversification on Top Management Incentives
Variable
Intercept
PPS
OLS
2.0796
(0.0494)
-0.0160
(0.0015)
Fixed Effect
1.7676
(0.0271)
0.0050
(0.0018)
-0.1191
(0.0608)
-0.1814
(0.0594)
-0.2416
(0.0581)
-0.3232
(0.0567)
-0.1108
(0.0571)
0.0270
-0.0123
(0.0250)
-0.0408
(0.0240)
-0.0691
(0.0245)
-0.0850
(0.0260)
0.1261
(0.0329)
0.8696
Investment
Dividend Yield
Ln(sales)
Ln(sales)2
Capital/Sales
(Capital/Sales)2
Cash Flow/Capital
Debt/Assets
Missing D/A
CDF of Std Dev
Missing Std Dev
R & D/Capital
Missing R&D/K
Advertising/Capital
Missing Adv/K
Year = 1994
Year = 1995
Year = 1996
Year = 1997
Year = 1998
OLS w/Controls
1.6475
(0.2015)
-0.0014
(0.0013)
-0.4973
(0.1261)
0.0749
(0.0253)
-0.2301
(0.0609)
0.0349
(0.0046)
-0.0659
(0.0329)
0.0012
(0.0012)
-0.0259
(0.0054)
0.1424
(0.0857)
-0.3185
(0.1134)
-0.2586
(0.0777)
-0.1024
(0.0877)
-0.0396
(0.0122)
0.0334
(0.0307)
0.1496
(0.0339)
0.3204
(0.0328)
-0.0929
(0.0564)
-0.1624
(0.0560)
-0.2092
(0.0561)
-0.2479
(0.0553)
-0.0333
(0.0546)
0.1780
FE w/Controls
1.6629
(0.3203)
0.0070
(0.0019)
0.0014
(0.0879)
0.0020
(0.0045)
-0.3017
(0.1036)
0.0488
(0.0094)
-0.1232
(0.0451)
0.0032
(0.0013)
-0.0187
(0.0062)
0.1556
(0.0830)
0.1496
(0.0868)
-0.4174
(0.1186)
-0.1919
(0.1080)
-0.0286
(0.0156)
0.0052
(0.0898)
0.0466
(0.0275)
-0.0115
(0.0296)
-0.0278
(0.0255)
-0.0838
(0.0267)
-0.1329
(0.0284)
-0.1719
(0.0319)
0.0234
(0.0408)
0.8749
R-squared
Notes:
1) Each regression pertains to our sample of 1602 firms and 7045 firm-years.
2) The Fixed Effects specification includes a dummy variable for each sample firm.
3) Heteroskedasticity-robust standard errors are reported in parentheses beneath each coefficient.
35
Table 5
Regressions of Diversification on CEO Incentives
Variable
Intercept
PPS
OLS
2.0508
(0.0489)
-0.0208
(0.0018)
Fixed Effect
1.8009
(0.0242)
0.0016
(0.0020)
-0.1171
(0.0610)
-0.1815
(0.0594)
-0.2396
(0.0582)
-0.3210
(0.0568)
-0.1112
(0.0572)
0.0228
-0.0141
(0.0250)
-0.0436
(0.0240)
-0.0731
(0.0243)
-0.0903
(0.0258)
0.1170
(0.0325)
0.8696
Investment
Dividend Yield
Ln(sales)
Ln(sales)2
Capital/Sales
(Capital/Sales)2
Cash Flow/Capital
Debt/Assets
Missing D/A
CDF of Std Dev
Missing Std Dev
R & D/Capital
Missing R&D/K
Advertising/Capital
Missing Adv/K
Year = 1994
Year = 1995
Year = 1996
Year = 1997
Year = 1998
OLS w/Controls
1.6447
(0.2016)
-0.0026
(0.0018)
-0.4987
(0.1262)
0.0746
(0.0252)
-0.2285
(0.0610)
0.0347
(0.0046)
-0.0659
(0.0329)
0.0012
(0.0012)
-0.0260
(0.0054)
0.1422
(0.0857)
-0.3155
(0.1136)
-0.2573
(0.0774)
-0.1011
(0.0876)
-0.0397
(0.0122)
0.0332
(0.0306)
0.1494
(0.0338)
0.3196
(0.0329)
-0.0923
(0.0564)
-0.1621
(0.0560)
-0.2088
(0.0560)
-0.2474
(0.0552)
-0.0344
(0.0546)
0.1779
FE w/Controls
1.7632
(0.3187)
0.0046
(0.0020)
0.0115
(0.0883)
0.0014
(0.0043)
-0.3135
(0.1037)
0.0491
(0.0095)
-0.1279
(0.0451)
0.0034
(0.0013)
-0.0191
(0.0061)
0.1595
(0.0831)
0.1488
(0.0872)
-0.4227
(0.1188)
-0.1928
(0.1081)
-0.0289
(0.0157)
0.0085
(0.0898)
0.0516
(0.0261)
-0.0113
(0.0296)
-0.0290
(0.0255)
-0.0853
(0.0267)
-0.1350
(0.0283)
-0.1749
(0.0319)
0.0174
(0.0407)
0.8747
R-squared
Notes:
1) Each regression pertains to our sample of 1602 firms and 7045 firm-years.
2) The Fixed Effects specification includes a dummy variable for each sample firm.
3) Heteroskedasticity-robust standard errors are reported in parentheses beneath each coefficient.
36
Table 6
Regressions of Tobin’s Q on Top Mgmt. Incentives Controlling for Changes in Diversification
Variable
Intercept
β1 PPS
β2 PPS x ∆
∆ (Change in SICs)
No. of 4-digit SICs
Investment
Dividend Yield
Ln(sales)
Ln(sales)2
Capital/Sales
(Capital/Sales)2
Cash Flow/Capital
Debt/Assets
Missing D/A
CDF of Std Dev
Missing Std Dev
R & D/Capital
Missing R&D/K
Advertising/Capital
Missing Adv/K
R-squared
OLS
2.1609
(0.1765)
0.0410
(0.0208)
-0.0460
(0.0209)
-0.0371
(0.1148)
-0.1866
(0.0197)
Fixed Effect
2.1308
(0.0552)
0.0201
(0.0041)
-0.0098
(0.0026)
-0.0047
(0.0337)
-0.0422
(0.0177)
OLS w/Controls
5.2414
(0.8674)
0.0311
(0.0212)
-0.0419
(0.0202)
-0.0318
(0.1062)
-0.0512
(0.0122)
2.3743
(0.4386)
0.0328
(0.0220)
-0.9842
(0.2219)
0.0391
(0.0144)
-0.2019
(0.0507)
-0.0004
(0.0025)
0.0178
(0.0218)
-0.8103
(0.1663)
0.6971
(0.4301)
2.6996
(0.2143)
1.9460
(0.4935)
-0.0068
(0.0626)
-0.1414
(0.0492)
0.1052
(0.1726)
-0.1121
(0.0579)
0.0698
0.8612
0.2355
Coefficient on Incentives (∆=1), p-value in [.]
-0.0050
0.0103
-0.0091
[0.214]
[0.019]
[0.076]
FE w/Controls
5.1524
(1.2796)
0.0150
(0.0036)
-0.0079
(0.0027)
-0.0205
(0.0317)
-0.0645
(0.0197)
0.9829
(0.1776)
-0.0228
(0.0168)
-0.9349
(0.3316)
0.0804
(0.0227)
-0.2926
(0.0694)
0.0048
(0.0024)
0.0716
(0.0226)
-0.9107
(0.1752)
-0.6668
(0.4959)
-0.9527
(0.2814)
-0.3415
(0.2998)
0.0409
(0.0342)
0.0521
(0.0907)
-0.2040
(0.0761)
-0.0137
(0.0587)
0.8690
0.0071
β1 + β2
[0.090]
H0: = 0
Notes:
1) Each regression pertains to our sample of 1602 firms and 7045 firm-years.
2) The Fixed Effects specification includes a dummy variable for each sample firm.
3) Heteroskedasticity-robust standard errors are reported in parentheses beneath each coefficient.
4) Year effects are included in all regressions but not reported.
5) ∆=1 if No. of 4-digit SICs has changed this year, ∆=0 otherwise.
37
Table 7
Regressions of Tobin’s Q on CEO Incentives Controlling for Changes in Diversification
Variable
Intercept
β1 PPS
β2 PPS x ∆
∆ (Change in SICs)
No. of 4-digit SICs
Investment
Dividend Yield
Ln(sales)
Ln(sales)2
Capital/Sales
(Capital/Sales)2
Cash Flow/Capital
Debt/Assets
Missing D/A
CDF of Std Dev
Missing Std Dev
R & D/Capital
Missing R&D/K
Advertising/Capital
Missing Adv/K
R-squared
OLS
2.3414
(0.0676)
0.0352
(0.0096)
-0.0460
(0.0107)
-0.1644
(0.0536)
-0.2065
(0.0125)
Fixed Effect
2.2317
(0.0521)
0.0119
(0.0045)
-0.0118
(0.0047)
-0.0387
(0.0178)
-0.0387
(0.0178)
OLS w/Controls
5.7221
(0.8551)
0.0194
(0.0076)
-0.0328
(0.0096)
-0.1569
(0.0502)
-0.0502
(0.0123)
2.4659
(0.5127)
0.0244
(0.0149)
-1.0386
(0.2390)
0.0410
(0.0150)
-0.2404
(0.0362)
0.0005
(0.0021)
0.0134
(0.0248)
-0.8612
(0.1591)
0.6892
(0.4440)
2.6326
(0.1794)
1.9129
(0.4933)
-0.0265
(0.0712)
-0.1093
(0.0359)
0.1499
(0.2046)
-0.1287
(0.0532)
0.0442
0.8606
0.2195
Coefficient on Incentives (∆=1), p-value in [.]
-0.0108
0.0001
-0.0134
[0.017]
[0.987]
[0.016]
FE w/Controls
5.4267
(1.2878)
0.0061
(0.0043)
-0.0092
(0.0047)
-0.0276
(0.0314)
-0.0608
(0.0197)
1.0045
(0.1789)
-0.0237
(0.0172)
-0.9712
(0.3336)
0.0817
(0.0228)
-0.3041
(0.0698)
0.0051
(0.0024)
0.0718
(0.0230)
-0.9082
(0.1747)
-0.6692
(0.4935)
-0.9702
(0.2832)
-0.3490
(0.3033)
0.0406
(0.0346)
0.0614
(0.0912)
-0.1989
(0.0772)
-0.0136
(0.0590)
0.8686
-0.0031
β1 + β2
[0.619]
H0: = 0
Notes:
1) Each regression pertains to our sample of 1602 firms and 7045 firm-years.
2) The Fixed Effects specification includes a dummy variable for each sample firm.
3) Heteroskedasticity-robust standard errors are reported in parentheses beneath each coefficient.
4) Year effects are included in all regressions but not reported.
5) ∆=1 if No. of 4-digit SICs has changed this year, ∆=0 otherwise.
38