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Uncertainty in Executive Compensation and Capital Investment: A Panel Study

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Author Info

  • Atreya Chakraborty

    ()
    (Brandeis University)

  • Mark Kazarosian

    ()
    (Boston College)

  • Emery Trahan

    (Northeastern University)

Abstract

We test whether uncertainty in the CEO's compensation influences the firm's investment decisions, using panel compensation data and cross-sectional invetsment data. Given the prospect of bearing extra risk, a rational agent reacts to minimize the impact of such risk. We provide evidence that CEOs with high earnings uncertainty invest less. As expected, the negative impact of permanent earnings uncertainty on firm investment is larger than that of transitory earnings uncertainty. The results are robust to several alternative specifications and lend support to Stulz' over-investment hypothesis. Knowing how investment is tied to the CEO's earnings uncertainty helps in building the correct compensation package.

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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 434.

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Length: 27 pages
Date of creation: 12 Jul 1999
Date of revision:
Handle: RePEc:boc:bocoec:434

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Keywords: executive compensation; capital investment; uncertainty;

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References

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Cited by:
  1. Choe, Heungsik & Lee, Bong-Soo, 2003. "Korean bank governance reform after the Asian financial crisis," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 11(4), pages 483-508, September.
  2. Wright, Peter & Mukherji, Ananda & Kroll, Mark J., 2001. "A reexamination of agency theory assumptions: extensions and extrapolations," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 30(5), pages 413-429.
  3. Ei Yet Chu & Saw Imm Song, 2012. "Executive Compensation, Earnings Management and Over Investment in Malaysia," Asian Academy of Management Journal of Accounting and Finance, Penerbit Universiti Sains Malaysia, vol. 8(Supp. 1), pages 13-37.

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