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Uncertainty, investment, and managerial incentives

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  • Glover, Brent
  • Levine, Oliver

Abstract

This study provides evidence that managerial incentives, shaped by compensation contracts, help to explain the empirical relationship between uncertainty and investment. We develop a model in which the manager, compensated with an equity-based contract, makes investment decisions for a firm that faces time-varying volatility. The contract creates incentives that affect both the sign and magnitude of a manager׳s optimal response to volatility shocks. The model is calibrated using compensation data to quantify this predicted investment response for a large panel of firms. Our estimates help explain the variation in firm-level investment responses to volatility shocks observed in the data.

Suggested Citation

  • Glover, Brent & Levine, Oliver, 2015. "Uncertainty, investment, and managerial incentives," Journal of Monetary Economics, Elsevier, vol. 69(C), pages 121-137.
    • Handle: RePEc:eee:moneco:v:69:y:2015:i:c:p:121-137
    DOI: 10.1016/j.jmoneco.2014.11.004
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