Abstract
This paper investigates managerial incentive alignment in diversified firms, using corporate spinoffs as the empirical context. The alignment of divisional managers' incentives to market performance improves once the business units they oversee are spun off from their diversified parent companies, resolving pre-spinoff misalignments therein. By contrast, there is no post-spinoff improvement in incentive alignment for the corporate managers running the divesting parent companies, and the level of compensation these managers earn rises relative to a benchmark set of companies. Taken together, the results in this paper contribute to corporate strategy research by elucidating an additional cost associated with diversification and by pointing to a yet-unexplored motivation for and consequence of corporate refocusing activity.
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