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Uncertainty in Executive Compensation and Capital Investment: A Panel Study

Author

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  • Atreya Chakraborty

    (Brandeis University)

  • Mark Kazarosian

    (Boston College)

  • Emery Trahan

    (Northeastern University)

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.

Suggested Citation

  • Atreya Chakraborty & Mark Kazarosian & Emery Trahan, 1999. "Uncertainty in Executive Compensation and Capital Investment: A Panel Study," Boston College Working Papers in Economics 434, Boston College Department of Economics.
    • Handle: RePEc:boc:bocoec:434
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    References listed on IDEAS

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    Cited by:

    1. Maria Elisabete Duante Neves, 2017. "Payout and Firm's Catering," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(4), pages 104-132.
    2. Wright, Peter & Mukherji, Ananda & Kroll, Mark J., 2001. "A reexamination of agency theory assumptions: extensions and extrapolations," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 30(5), pages 413-429.
    3. repec:ers:journl:v:v:y:2017:i:4:p:104-132 is not listed on IDEAS
    4. Choe, Heungsik & Lee, Bong-Soo, 2003. "Korean bank governance reform after the Asian financial crisis," Pacific-Basin Finance Journal, Elsevier, vol. 11(4), pages 483-508, September.
    5. Ei Yet Chu & Saw Imm Song, 2012. "Executive Compensation, Earnings Management and Over Investment in Malaysia," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 8(Supp. 1), pages 13-37.

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    Keywords

    executive compensation; capital investment; uncertainty;
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