Diversified firms and corporate labor policy: The role of managerial equity incentives

Abstract

In this study, we examine whether managers of diversified firms make efficient labor investment decisions. Using a sample of 36,102 firm-year observations over the period 1989–2021, we find that managers of diversified firms make inefficient labor investment decisions. This finding is robust to a battery of sensitivity tests, alternative model specifications, and endogeneity concerns. We further document that the positive relationship between diversification and inefficient labor investment is long lasting, but is attenuated when managers of diversified firms are granted equity incentives. Our results suggest that self-seeking managers may strategically use diversification to obfuscate their suboptimal behaviors. Overall, our findings provide valuable insights into the complexities of resource allocation strategies and contribute to a broader understanding of corporate decision-making.