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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)

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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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Publisher 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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Related research
Keywords: executive compensation; capital investment; uncertainty;

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  22. Cox, Donald, 1990. "Intergenerational Transfers and Liquidity Constraints," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 187-217, February. [Downloadable!] (restricted)
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  1. Neves, Elisabete & Pindado, Julio & Torre, Chabela de la, 2006. "Dividends: New evidence on the catering theory," Documentos de Trabajo "Nuevas Tendencias en Dirección de Empresas". Working Papers "New Trends on Business Administration". 2006-14, Interuniversitary Doctorate Program "New Trends on Business Administration", Universities of Valladolid, Burgos and Salamanca (Spain). Programa de Doctorado Interuniversitario "Nuevas Tendencias en Di. [Downloadable!]
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