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Uncertainty in Executive Compensation and Capital Investment: A Panel Study

  • Atreya Chakraborty

    ()

    (Brandeis University)

  • Mark Kazarosian

    ()

    (Boston College)

  • Emery Trahan

    (Northeastern University)

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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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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