Uncertainty in Executive Compensation and Capital Investment: A Panel Study

Financial Management, Vol. 28, Iss. 4, Winter 1999

Posted: 12 Sep 2001

See all articles by Atreya Chakraborty

Atreya Chakraborty

University of Massachusetts Boston - Department of Accounting and Finance

Mark Kazarosian

Boston College - Department of Economics

Emery A. Trahan

Northeastern University, Finance Group

Abstract

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.

Suggested Citation

Chakraborty, Chuck Atreya and Kazarosian, Mark and Trahan, Emery A., Uncertainty in Executive Compensation and Capital Investment: A Panel Study. Financial Management, Vol. 28, Iss. 4, Winter 1999. Available at SSRN: https://ssrn.com/abstract=267715

Chuck Atreya Chakraborty (Contact Author)

University of Massachusetts Boston - Department of Accounting and Finance ( email )

Boston, MA 02125
United States
(617) 287-7673 (Phone)

HOME PAGE: http://www.management.umb.edu/faculty/chakraborty_atreya.php

Mark Kazarosian

Boston College - Department of Economics

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Emery A. Trahan

Northeastern University, Finance Group ( email )

Boston, MA 02115
United States

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