77 NTU Management Review Vol. 31 No. 1 Apr. 2021 (Lintner, 1965; Sharpe, 1964). Since any specific events would not simultaneously affect all firms within a diversified business group, firms in the diversified business group theoretically have lower idiosyncratic risk than those in the focused group. Chen and Steiner (2000) find the consistent result that the level of diversification, measured by the concentric diversification index, is inversely related to both total risk and idiosyncratic risk. However, Lubatkin and O’Neill (1987) examine the changes in risk for four groups of mergers varying with merger relatedness and show idiosyncratic risk increases in all groups. In addition, acquirers would experience high post-merger idiosyncratic risk due to administrative pitfalls. The improper process of consolidation could lead to increased idiosyncratic risk (Lubatkin, 1983; Jemison and Sitkin, 1986; Lubatkin and O’Neill, 1987; Chatterjee and Lubatkin, 1990). Langetieg, Haugen, and Wichern (1980) first suggest inefficient consolidation is highly associated with the differences in managerial styles, corporate culture, the controlling systems and/or business models between acquirers and targets. Through analyses of default risk, Furfine and Rosen (2011) find consistent results. Firms with high idiosyncratic risk cannot effectively diversify risk through M&A decisions but increase their default risk after the merger activities. They argue this is because the managerial teams of these firms are usually overconfident in their capability to manage post-merger corporations. In other words, these findings suggest the idiosyncratic risk following M&A activities may not necessarily decrease with business diversification but indeed increase due to administrative pitfalls. Overall, prior studies document firms undertaking M&As activities are more likely to increase their exposure to idiosyncratic risk than to systematic risk. Although the decrease in post-merger systematic risk is more profound in related deals, the increase in systematic risk can still be more easily controlled or improved via hedging activities (Armstrong and Vashishtha, 2012). However, the post-merger idiosyncratic risk more likely increases due to the high complexity of merger integration as well as the possible misconducting of the merger process, which are less likely to be avoided and more likely increase post-merger default risk (Furfine and Rosen, 2011). Consequently, the manager’s concern about the post-merger risk is more associated with idiosyncratic risk than with systematic risk. 2.3 Empirical Predictions M&As are one major type of corporate investments CEOs could undertake to respond to the risk incentive of ESOs. (Datta, Iskandar-Datta, and Raman, 2001; Croci
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