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Uncertainty, Investment, and Managerial Incentives

37 Pages Posted: 4 Jul 2014 Last revised: 8 Oct 2016

Brent Glover

Carnegie Mellon University - David A. Tepper School of Business

Oliver Levine

University of Wisconsin - Madison

Date Written: October 1, 2014

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.

Keywords: Uncertainty, Corporate Investment, Agency Conflicts, Moral Hazard

Suggested Citation

Glover, Brent and Levine, Oliver, Uncertainty, Investment, and Managerial Incentives (October 1, 2014). Journal of Monetary Economics, 2015. Available at SSRN: https://ssrn.com/abstract=2461801 or http://dx.doi.org/10.2139/ssrn.2461801

Brent Glover

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Oliver Levine (Contact Author)

University of Wisconsin - Madison ( email )

975 University Avenue
Madison, WI 53706
United States

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