IDEAS home Printed from https://ideas.repec.org/a/eee/ecofin/v76y2025ics1062940824002742.html
   My bibliography  Save this article

The impact of outcome uncertainty on corporate investment compensation peer effects

Author

Listed:
  • Lin, Yu-En
  • Xu, Yu-Xin
  • Yu, Bo
  • Lam, Keith S.K.

Abstract

This study investigates the compensation peer effect of investments and the moderate effect of outcome uncertainty on the compensation peer effect in the US stock markets. We document two new findings. Our results suggest a significant positive relation between firms’ own and compensation peers’ investments and a significant negative moderate effect of the outcome uncertainty on the relation. In addition, we also find that the moderate effect is more pronounced in the low information accuracy groups, suggesting that the inaccurate information disclosure of compensation peers’ investments is the main cause of the negative moderate effect. Our results remain sound after various robustness and endogenous tests.

Suggested Citation

  • Lin, Yu-En & Xu, Yu-Xin & Yu, Bo & Lam, Keith S.K., 2025. "The impact of outcome uncertainty on corporate investment compensation peer effects," The North American Journal of Economics and Finance, Elsevier, vol. 76(C).
    • Handle: RePEc:eee:ecofin:v:76:y:2025:i:c:s1062940824002742
    DOI: 10.1016/j.najef.2024.102349
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1062940824002742
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.najef.2024.102349?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    2. Mark T. Leary & Michael R. Roberts, 2014. "Do Peer Firms Affect Corporate Financial Policy?," Journal of Finance, American Finance Association, vol. 69(1), pages 139-178, February.
    3. Fama, Eugene F. & French, Kenneth R., 2017. "International tests of a five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 123(3), pages 441-463.
    4. Ulrike Malmendier & Geoffrey Tate, 2005. "CEO Overconfidence and Corporate Investment," Journal of Finance, American Finance Association, vol. 60(6), pages 2661-2700, December.
    5. Foucault, Thierry & Fresard, Laurent, 2014. "Learning from peers' stock prices and corporate investment," Journal of Financial Economics, Elsevier, vol. 111(3), pages 554-577.
    6. Francis, Bill & Hasan, Iftekhar & Mani, Sureshbabu & Ye, Pengfei, 2016. "Relative peer quality and firm performance," Journal of Financial Economics, Elsevier, vol. 122(1), pages 196-219.
    7. Adhikari, Binay K. & Agrawal, Anup, 2018. "Peer influence on payout policies," Journal of Corporate Finance, Elsevier, vol. 48(C), pages 615-637.
    8. Li, Chengcheng & Wang, Xiaoqiong, 2022. "Local peer effects of corporate social responsibility," Journal of Corporate Finance, Elsevier, vol. 73(C).
    9. Albuquerque, Ana, 2009. "Peer firms in relative performance evaluation," Journal of Accounting and Economics, Elsevier, vol. 48(1), pages 69-89, October.
    10. Albuquerque, Ana M. & De Franco, Gus & Verdi, Rodrigo S., 2013. "Peer choice in CEO compensation," Journal of Financial Economics, Elsevier, vol. 108(1), pages 160-181.
    11. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    12. Roychowdhury, Sugata & Shroff, Nemit & Verdi, Rodrigo S., 2019. "The effects of financial reporting and disclosure on corporate investment: A review," Journal of Accounting and Economics, Elsevier, vol. 68(2).
    13. Francis, Bill & Hasan, Iftekhar & Mani, Sureshbabu & Ye, Pengfei, 2016. "Relative peer quality and firm performance," Journal of Financial Economics, Elsevier, vol. 122(1), pages 196-219.
    14. Beatty, Anne & Liao, Scott & Yu, Jeff Jiewei, 2013. "The spillover effect of fraudulent financial reporting on peer firms' investments," Journal of Accounting and Economics, Elsevier, vol. 55(2), pages 183-205.
    15. Bizjak, John & Lemmon, Michael & Nguyen, Thanh, 2011. "Are all CEOs above average? An empirical analysis of compensation peer groups and pay design," Journal of Financial Economics, Elsevier, vol. 100(3), pages 538-555, June.
    16. Grzegorz Pawlina & Luc Renneboog, 2005. "Is Investment‐Cash Flow Sensitivity Caused by Agency Costs or Asymmetric Information? Evidence from the UK," European Financial Management, European Financial Management Association, vol. 11(4), pages 483-513, September.
    17. Paul Gompers & Joy Ishii & Andrew Metrick, 2003. "Corporate Governance and Equity Prices," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(1), pages 107-156.
    18. Stulz, ReneM., 1990. "Managerial discretion and optimal financing policies," Journal of Financial Economics, Elsevier, vol. 26(1), pages 3-27, July.
    19. Favara, Giovanni & Gao, Janet & Giannetti, Mariassunta, 2021. "Uncertainty, access to debt, and firm precautionary behavior," Journal of Financial Economics, Elsevier, vol. 141(2), pages 436-453.
    20. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    21. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
    22. Al-Najjar, Basil, 2017. "Corporate governance and CEO pay: Evidence from UK Travel and Leisure listed firms," Tourism Management, Elsevier, vol. 60(C), pages 9-14.
    23. Chen, Tao & Xie, Lingmin & Zhang, Yuanyuan, 2017. "How does analysts' forecast quality relate to corporate investment efficiency?," Journal of Corporate Finance, Elsevier, vol. 43(C), pages 217-240.
    24. Ali-Rind, Asad & Boubaker, Sabri & Jarjir, Souad Lajili, 2023. "Peer effects in financial economics: A literature survey," Research in International Business and Finance, Elsevier, vol. 64(C).
    25. Jones, Jj, 1991. "Earnings Management During Import Relief Investigations," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 29(2), pages 193-228.
    26. Peter R. Demerjian, 2017. "Uncertainty and debt covenants," Review of Accounting Studies, Springer, vol. 22(3), pages 1156-1197, September.
    27. David L. Deephouse, 1999. "To be different, or to be the same? It’s a question (and theory) of strategic balance," Strategic Management Journal, Wiley Blackwell, vol. 20(2), pages 147-166, February.
    28. Jun Bai & Lishuai Lian, 2013. "Why do state-owned enterprises over-invest? Government intervention or managerial entrenchment," China Journal of Accounting Studies, Taylor & Francis Journals, vol. 1(3-4), pages 236-259, December.
    29. Campello, Murillo & Graham, John R. & Harvey, Campbell R., 2010. "The real effects of financial constraints: Evidence from a financial crisis," Journal of Financial Economics, Elsevier, vol. 97(3), pages 470-487, September.
    30. Todd Mitton, 2022. "Methodological Variation in Empirical Corporate Finance," The Review of Financial Studies, Society for Financial Studies, vol. 35(2), pages 527-575.
    31. Chen, Yi-Wen & Chan, Konan & Chang, Yuanchen, 2019. "Peer effects on corporate cash holdings," International Review of Economics & Finance, Elsevier, vol. 61(C), pages 213-227.
    32. Humphery-Jenner, Mark & Lisic, Ling Lei & Nanda, Vikram & Silveri, Sabatino Dino, 2016. "Executive overconfidence and compensation structure," Journal of Financial Economics, Elsevier, vol. 119(3), pages 533-558.
    33. Lin, Yu-En & Li, Yi-Wen & Cheng, Teng Yuan & Lam, Keith, 2021. "Corporate social responsibility and investment efficiency: Does business strategy matter?," International Review of Financial Analysis, Elsevier, vol. 73(C).
    34. Bhandari, Avishek & Javakhadze, David, 2017. "Corporate social responsibility and capital allocation efficiency," Journal of Corporate Finance, Elsevier, vol. 43(C), pages 354-377.
    35. Lu Guo & WeiYa Long & Zhimin Dai, 2021. "Manufacturing R&D investment efficiency and financing constraints: evidence from China," Applied Economics, Taylor & Francis Journals, vol. 53(6), pages 676-687, February.
    36. Shuping Chen & Bin Miao & Terry Shevlin, 2015. "A New Measure of Disclosure Quality: The Level of Disaggregation of Accounting Data in Annual Reports," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 53(5), pages 1017-1054, December.
    37. Hsu, Yuan-Teng & Huang, Chia-Wei & Koedijk, Kees G., 2023. "Unintended consequences of compensation peer groups on corporate innovation," Journal of Corporate Finance, Elsevier, vol. 78(C).
    38. Fama, Eugene F. & French, Kenneth R., 2015. "A five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 116(1), pages 1-22.
    39. Custódio, Cláudia & Ferreira, Miguel A. & Matos, Pedro, 2013. "Generalists versus specialists: Lifetime work experience and chief executive officer pay," Journal of Financial Economics, Elsevier, vol. 108(2), pages 471-492.
    40. repec:zbw:bofrdp:2016_006 is not listed on IDEAS
    41. Kim, Yongtae & Li, Haidan & Li, Siqi, 2014. "Corporate social responsibility and stock price crash risk," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 1-13.
    42. Choi, Daewoung & Cicero, David & Mobbs, Shawn, 2022. "CEO Marketability, Employment Opportunities, and Compensation: Evidence from Compensation Peer Citations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 57(7), pages 2766-2797, November.
    43. Aggarwal, Rajesh K. & Samwick, Andrew A., 2006. "Empire-builders and shirkers: Investment, firm performance, and managerial incentives," Journal of Corporate Finance, Elsevier, vol. 12(3), pages 489-515, June.
    44. Guariglia, Alessandra & Yang, Junhong, 2016. "A balancing act: Managing financial constraints and agency costs to minimize investment inefficiency in the Chinese market," Journal of Corporate Finance, Elsevier, vol. 36(C), pages 111-130.
    45. Michael B. Clement & Senyo Y. Tse, 2005. "Financial Analyst Characteristics and Herding Behavior in Forecasting," Journal of Finance, American Finance Association, vol. 60(1), pages 307-341, February.
    46. Sande, Jon Bingen & Ghosh, Mrinal, 2018. "Endogeneity in survey research," International Journal of Research in Marketing, Elsevier, vol. 35(2), pages 185-204.
    47. Li, Kaifeng & Xia, Bobo & Chen, Yun & Ding, Ning & Wang, Jie, 2021. "Environmental uncertainty, financing constraints and corporate investment: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 70(C).
    48. Thomas W. Bates, 2005. "Asset Sales, Investment Opportunities, and the Use of Proceeds," Journal of Finance, American Finance Association, vol. 60(1), pages 105-135, February.
    49. M. Cecilia Bustamante & Laurent Frésard, 2021. "Does Firm Investment Respond to Peers’ Investment?," Management Science, INFORMS, vol. 67(8), pages 4703-4724, August.
    50. Ascioglu, Asli & Hegde, Shantaram P. & McDermott, John B., 2008. "Information asymmetry and investment-cash flow sensitivity," Journal of Banking & Finance, Elsevier, vol. 32(6), pages 1036-1048, June.
    51. Michael L. Lemmon & Michael R. Roberts & Jaime F. Zender, 2008. "Back to the Beginning: Persistence and the Cross‐Section of Corporate Capital Structure," Journal of Finance, American Finance Association, vol. 63(4), pages 1575-1608, August.
    52. Charles Ham & Mark Lang & Nicholas Seybert & Sean Wang, 2017. "CFO Narcissism and Financial Reporting Quality," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 55(5), pages 1089-1135, December.
    53. Lin, Yu-En & Jiang, Xiao-Tong & Yu, Bo & Lam, Keith S.K., 2023. "Compensation peer crash risks and corporate own investments: New evidences from U.S. stock markets," International Review of Financial Analysis, Elsevier, vol. 89(C).
    54. Anagnostopoulou, Seraina C. & Avgoustaki, Argyro, 2023. "The impact of human resource practices on corporate investment efficiency," International Review of Financial Analysis, Elsevier, vol. 87(C).
    55. Obeng, Victoria A. & Ahmed, Kamran & Miglani, Seema, 2020. "Integrated reporting and earnings quality: The moderating effect of agency costs," Pacific-Basin Finance Journal, Elsevier, vol. 60(C).
    56. David Abad & Juan Pedro Sánchez-Ballesta & José Yagüe, 2017. "The short-term debt choice under asymmetric information," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 8(3), pages 261-285, August.
    57. Diane K Denis & Torsten Jochem & Anjana Rajamani & Wei Jiang, 2020. "Shareholder Governance and CEO Compensation: The Peer Effects of Say on Pay," The Review of Financial Studies, Society for Financial Studies, vol. 33(7), pages 3130-3173.
    58. Healy, Paul M. & Palepu, Krishna G., 2001. "Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 405-440, September.
    59. Faulkender, Michael & Yang, Jun, 2010. "Inside the black box: The role and composition of compensation peer groups," Journal of Financial Economics, Elsevier, vol. 96(2), pages 257-270, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lin, Yu-En & Teng, Shi & Yu, Bo & Lam, Keith S.K., 2025. "ESG rating, rating divergence and investment efficiency: International evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 100(C).
    2. Lin, Yu-En & Jiang, Xiao-Tong & Yu, Bo & Lam, Keith S.K., 2023. "Compensation peer crash risks and corporate own investments: New evidences from U.S. stock markets," International Review of Financial Analysis, Elsevier, vol. 89(C).
    3. Chang, Yuyuan & Foss, Nicolai J. & Li, Shuping & Xie, Jing, 2024. "Compensation peer effects of corporate social responsibility," Journal of Corporate Finance, Elsevier, vol. 89(C).
    4. An, Suwei, 2023. "Essays on incentive contracts, M&As, and firm risk," Other publications TiSEM dd97d2f5-1c9d-47c5-ba62-f, Tilburg University, School of Economics and Management.
    5. Vijayakumaran, Ratnam, 2021. "Impact of managerial ownership on investment and liquidity constraints: Evidence from Chinese listed companies," Research in International Business and Finance, Elsevier, vol. 55(C).
    6. Chien Chi Chu & Xiu‐Fen Su & Yu‐En Lin & Akihiro Omura & Bin Li & Adrian Wai‐Kong Cheung, 2023. "Love thy neighbour: Evidence from capital structure decisions," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(3), pages 2907-2933, September.
    7. Hsu, Yuan-Teng & Huang, Chia-Wei & Koedijk, Kees G., 2023. "Unintended consequences of compensation peer groups on corporate innovation," Journal of Corporate Finance, Elsevier, vol. 78(C).
    8. Fu, Zheng & Ma, Yechi & Li, Suyang & Qiao, Lu, 2023. "Peer performance and the asymmetric timeliness of earnings recognition," International Review of Financial Analysis, Elsevier, vol. 85(C).
    9. Di Xiao & Xinyu Yu, 2025. "How do credit ratings affect corporate investment efficiency?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 30(1), pages 330-351, January.
    10. Liu, Yin & Neely, Pamela & Karim, Khondkar, 2022. "The impact of CFO gender on corporate overinvestment," Advances in accounting, Elsevier, vol. 57(C).
    11. Samet, Marwa & Jarboui, Anis, 2017. "How does corporate social responsibility contribute to investment efficiency?," Journal of Multinational Financial Management, Elsevier, vol. 40(C), pages 33-46.
    12. Zhu, Yanli & Yin, Li & Lu, Xueyan, 2024. "Peer effects with multifaceted network dependence structures in R&D investment decisions: Evidence from Chinese listed firms," Research in International Business and Finance, Elsevier, vol. 70(PA).
    13. Naeem, Kashif & Li, Matthew C., 2019. "Corporate investment efficiency: The role of financial development in firms with financing constraints and agency issues in OECD non-financial firms," International Review of Financial Analysis, Elsevier, vol. 62(C), pages 53-68.
    14. Xin Qu & Majella Percy & Fang Hu & Jenny Stewart, 2022. "Can CEO equity‐based compensation limit investment‐related agency problems?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(2), pages 2579-2614, June.
    15. Kim, Sang-Joon & Bae, John & Oh, Hannah, 2019. "Financing strategically: The moderation effect of marketing activities on the bifurcated relationship between debt level and firm valuation of small and medium enterprises," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 663-681.
    16. Francis, Bill & Hasan, Iftekhar & Mani, Sureshbabu & Ye, Pengfei, 2016. "Relative peer quality and firm performance," Journal of Financial Economics, Elsevier, vol. 122(1), pages 196-219.
    17. Asiri, Mohammed & Al-Hadi, Ahmed & Taylor, Grantley & Duong, Lien, 2020. "Is corporate tax avoidance associated with investment efficiency?," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    18. Guariglia, Alessandra & Yang, Junhong, 2016. "A balancing act: Managing financial constraints and agency costs to minimize investment inefficiency in the Chinese market," Journal of Corporate Finance, Elsevier, vol. 36(C), pages 111-130.
    19. Cave, Joshua & Lancheros, Sandra, 2024. "Local peer influence on dividend payout decisions," Journal of Banking & Finance, Elsevier, vol. 164(C).
    20. Yadong Wang & Khaldoon Albitar & Imad Chbib, 2024. "Connecting the dots: A systematic review of corporate social responsibility, information asymmetry, and economic implications," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(5), pages 5012-5031, September.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecofin:v:76:y:2025:i:c:s1062940824002742. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620163 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.