Economics Department
Working Papers in Economics
| <Previous Article | Next Article> |
TITLE:
Uncertainty in Executive Compensation and Capital Investment: A Panel Study
AUTHOR(S):
Atreya Chakraborty , Brandeis University
Mark Kazarosian, Boston College
Emery Trahan , Northeastern University
DOCUMENT TYPE: Article
- Download the Document (PDF format - 112 K) - July 1999
- Tell a colleague about it.
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.