Business Strategy, Over- (Under-) Investment and Managerial Compensation

Posted: 11 Jul 2016

See all articles by Farshid Navissi

Farshid Navissi

Monash University

V.G. Sridharan

Deakin University

Mehdi Khedmati

Monash University

Edwin Lim

Deakin University - Department of Accounting

Egor Evdokimov

Monash University

Date Written: 2016

Abstract

This study examines whether and how business strategy influences a firm's over- and under-investment decisions. Prospector and defender strategies expose firms to different required levels of investment, monitoring, and managerial discretion which have implications for managerial investment decisions. Our results provide evidence that firms with an innovation-orientated prospector strategy are more likely to overinvest, whereas firms following an efficiency-orientated defender strategy are more likely to underinvest. These over- and under-investments are associated with poorer future firm performance. Moreover, the level of over- (under-) investment is exacerbated in the presence of more stock- (cash-) based compensation in prospector (defender) firms. Our results are robust to a number of checks such as ordered logit analysis, individual components of business strategy, individual components of investment, year-by-year and industry-by-industry analysis, controlling for lagged investment residuals, controlling for firm fixed-effect, first-differenced specification, and propensity score matching.

Keywords: Business Strategy, Over-investment, Under-investment, Managerial Compensation

Suggested Citation

Navissi, Farshid and Sridharan, V.G. and Khedmati, Mehdi and Lim, Edwin and Evdokimov, Egor, Business Strategy, Over- (Under-) Investment and Managerial Compensation (2016). Journal of Management Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2806967

Farshid Navissi (Contact Author)

Monash University ( email )

Building H, Caulfield Campus
Melbourne, Victoria 3142 Vic 3145
Australia
+61 405 664941 (Phone)

V.G. Sridharan

Deakin University ( email )

221 Burwood Highway
Burwood, Victoria 3215
Australia

Mehdi Khedmati

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Edwin Lim

Deakin University - Department of Accounting ( email )

Australia

Egor Evdokimov

Monash University ( email )

Wellington Road
Melbourne, Victoria 3800
Australia

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