Uncertainty in Executive Compensation and Capital Investment: A Panel Study
Financial Management, Vol. 28, Iss. 4, Winter 1999
Posted: 12 Sep 2001
We investigate whether uncertainty in CEO compensation influences the firm's investment decisions. We use panel data on compensation to estimate CEO income uncertainty and cross-sectional investment data to measure capital investment. 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. We find that the negative impact of permanent earnings uncertainty on firm investment is larger than that of transitory earnings uncertainty. Our results are robust to several alternate specifications and can be helpful in building compensation packages that lead to desired outcomes.
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