Information Technology Investments, CEO Compensation and Market Valuation

41 Pages Posted: 1 Aug 2007 Last revised: 21 Jul 2008

See all articles by Adi Masli

Adi Masli

University of Arkansas - Sam M. Walton College of Business

Vernon J. Richardson

University of Arkansas at Fayetteville

Juan Manuel Sanchez

University of Texas at San Antonio

Rod Smith

Cal State University Long Beach

Date Written: June 2008

Abstract

Managers face tradeoffs. On one hand, CEOs make IT spending decisions in anticipation of generating competitive advantages and productivity improvements. On the other hand, CEOs realize the risky nature of IT spending and its immediate negative effect on current income. Boards of directors, recognizing the potential long-term contribution of IT to firm value, should thus structure its CEO compensation packages to encourage strategic IT spending. To test this proposition, we examine the relation between IT spending and various components of CEO compensation and assess its impact on firm value. Our empirical results suggest that IT spending is positively related to ratio of equity to total CEO compensation. This result is consistent with the notion that boards of directors understand that payoffs to IT are uncertain and, hence, tie CEO compensation to the long-term results by placing greater weight on equity compensation. Furthermore, we find that boards of directors shield CEOs' cash compensation from the earnings decreasing effects of IT expense to mitigate potential underinvestment in IT. Finally, we conclude that the synergistic relationship between IT spending and CEO equity compensation is positively associated with firm market value. Bridging the two research streams of business value of IT and CEO compensation, our study contributes to the literature by examining how ties between IT and CEO compensation contracts impact firm value.

Keywords: IT Investments, CEO compensation, Shielding

JEL Classification: M41, M52

Suggested Citation

Masli, Adi and Richardson, Vernon J. and Sanchez, Juan Manuel and Smith, Rodney E., Information Technology Investments, CEO Compensation and Market Valuation (June 2008). Available at SSRN: https://ssrn.com/abstract=1004204 or http://dx.doi.org/10.2139/ssrn.1004204

Adi Masli

University of Arkansas - Sam M. Walton College of Business ( email )

Fayetteville, AR 72701
United States

Vernon J. Richardson

University of Arkansas at Fayetteville ( email )

401 WCOB
Fayetteville, AR 72701
United States

Juan Manuel Sanchez (Contact Author)

University of Texas at San Antonio ( email )

One UTSA Circle
San Antonio, TX 78249
United States

Rodney E. Smith

Cal State University Long Beach ( email )

Long Beach, CA 90840
United States
562-985-5421 (Phone)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
207
Abstract Views
1,454
rank
165,624
PlumX Metrics