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Managerial incentives and a firm's cash flow sensitivities

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  • Xu, Pisun (Tracy)

Abstract

This paper adds a new perspective to the compensation literature by examining the impact of managerial incentives on firm behavior in an information asymmetry framework. The analyses show that managerial equity-based compensation exacerbates firms' information asymmetry problems by focusing managers on the interests of existing shareholders. Firms with equity-based compensation rely more on internal funds. When there is a one-standard deviation increase in managerial equity-based compensation, firms will invest $0.05 more, save $0.02 more as cash and make a $0.07 lower net payout in response to a $1 increase in cash flow. Furthermore, the significant impact of managerial incentives on firms' cash flow sensitivities is predominant in small firms and firms with high market-to-book values.

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  • Xu, Pisun (Tracy), 2013. "Managerial incentives and a firm's cash flow sensitivities," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 80-96.
    • Handle: RePEc:eee:reveco:v:27:y:2013:i:c:p:80-96
    DOI: 10.1016/j.iref.2012.09.004
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    Cited by:

    1. Tang, Chun-Hua, 2016. "Impacts of future compensation on the incentive effects of existing executive stock options," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 273-285.
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    3. Chen, Chao-Jung & Hsu, Chung-Yuan & Chen, Yu-Lin, 2014. "The impact of family control on the top management compensation mix and incentive orientation," International Review of Economics & Finance, Elsevier, vol. 32(C), pages 29-46.
    4. Xiang Zhang & Zongyi Zhang & Han Zhou, 2023. "Grabbing hand or financial constraint mitigation effect? A reexamination of the relationship between institutional development and cash holdings," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(1), pages 631-655, March.

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    More about this item

    Keywords

    Managerial incentives; Cash flow sensitivities; Executive compensation; Information asymmetry;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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