Pay inequality and corporate divestitures

Emilie R. Feldman · Claudine Madras Gartenberg · Julie M. Wulf

41 citations0/0 files storedStrategic Management Journal

No readable copy stored yet — this record is metadata only.

No open-access location is known for this record yet.

Literature note Cite in a project Citation map

Corporate Finance and Governance Accounting and Organizational Management Human Resource and Talent Management

Abstract

Research Summary : This paper analyzes how pay inequality influences divestiture decisions. Using detailed data on division manager compensation and divestiture activity, this study documents that firms are more likely to divest divisions when pay inequality among division managers is higher. To address potential bias in the measurement of pay inequality, we construct a “synthetic” measure that varies with regional and industry pay shocks that differentially affect division managers within firms. Post hoc analyses reveal that social comparison appears to explain, at least partially, the relationship between unequal pay and divestiture. These findings support the notion that pay inequality can be an important predictor of firm boundaries. More generally, they suggest that unequal pay may have significant strategic consequences as firms increasingly adopt performance‐based compensation to motivate employees. Managerial Summary : This paper analyzes the link between the degree of inequality in division manager compensation and the likelihood that companies divest businesses. We find that companies are more likely to divest when the pay of their division managers is more widely dispersed. Supplementary analyses show that this relationship is stronger when division managers are more likely to compare their pay to that of their peers, for example, within companies whose divisions operate in more closely related industries or in more proximate geographic regions. These findings show that pay inequality can predict when companies choose to exit businesses. As such, it is relevant for understanding how corporate strategy is influenced by performance‐based compensation policies, particularly as these policies become the norm in companies around the world.

Paper brief

Loading…

Cite this work

Citation unavailable for this work.

BibTeX RIS CSL-JSON

No public copy is stored for this record, so only the metadata is cited.

Citations in this library

Citation map →

Stored only when both papers are in the corpus — 41 citations exist upstream.

References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1954A Theory of Social Comparison Processes 1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1965Inequity In Social Exchange 1996Agency costs of free cash flow, corporate finance, and takeovers 1979Moral Hazard and Observability 1989Social Identity Theory and the Organization 1997Industry costs of equity

Cited by

2023Leveraging Data-Driven Insights to Enhance Market Share in the Media Industry 2021Transparency in relational contracts 2021In retrospect: The influence of chief executive officers’ historical relative pay on overconfidence 2021Executive pay dispersion: Reconciling the differing effects of pay inequality and pay inequity on firm performance

Explore the map →

Papers that cite the same references — the relational fallback while embeddings are still backfilling.

Imported from OpenAlex (CC0) — nothing here is generated.