Compensation risk borne by chief executive officers after refocusing: The impact of divestment intensity, R&D intensity, and board composition

Although refocusing is a popular strategy for firms to rejuvenate themselves, change strategic direction and improve performance, empirical research has been inconclusive about the benefits of restructuring. Instead of examining firm performance, this study investigates the impact of refocusing on the compensation risk borne by top managers. This dissertation draws on agency theory to suggest that firms that significantly reduce diversification through refocusing might shift risk to managers. For such firms, overcoming managers' risk aversion is important to achieve strategy change and good performance. Thus, the conceptual arguments in this dissertation suggest that firms that have recently refocused might increase top managers' pay levels. The extent of this increase is hypothesized to be related to the intensity of divestitures during refocusing. Additionally, the risk associated with the competitive situation (as measured by technological opportunity) and board of directors' vigilance (represented by board composition) is suggested to moderate the impact of divestment intensity on pay level.;This dissertation contributes to agency theory by pointing out the importance of managers' risk aversion, and studying the antecedents of managerial risk-bearing. It shows how risk-bearing concerns enable top managers' pay to rise even in the absence of opportunism. Through examining the impact of technological opportunity on pay level, it underscores the importance of firm context. Finally, in studying the role of board composition on managers' risk-bearing, this dissertation suggests that there are situations, such as refocusing, when director independence may actually act counter to the firm's interests.