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The role of equity compensation in reducing inefficient investment in labor

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  • Sualihu, Mohammed Aminu
  • Rankin, Michaela
  • Haman, Janto

Abstract

We investigate whether equity compensation incentivizes executives to make efficient labor investment decisions. In doing so, we examine the extent to which stock options and restricted stock differentially influence labor investment decisions. Consistent with theoretical predictions, we find that stock options exacerbate, while restricted stock mitigates, inefficient labor investment. The effect of stock options (restricted stock) are weaker (stronger) for financially constrained firms. Our results are robust to alternative proxies for inefficient labor investment and when addressing a range of endogeneity concerns. Our research demonstrates that stock options and restricted stock matter in executives' labor investment decisions, but in different ways. Our findings have implications for future research, suggesting that stock options and restricted stock need to be separately considered when examining the impact equity compensation has on capital or investment decision making; and for executive remuneration practice.

Suggested Citation

  • Sualihu, Mohammed Aminu & Rankin, Michaela & Haman, Janto, 2021. "The role of equity compensation in reducing inefficient investment in labor," Journal of Corporate Finance, Elsevier, vol. 66(C).
    • Handle: RePEc:eee:corfin:v:66:y:2021:i:c:s0929119920302327
    DOI: 10.1016/j.jcorpfin.2020.101788
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    More about this item

    Keywords

    Labor investment; Executive compensation; Stock options; Restricted stock; Empire-building; Risk-aversion;
    All these keywords.

    JEL classification:

    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M51 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Firm Employment Decisions; Promotions
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • M54 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Labor Management

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