Managerial Equity Incentives and the Investment-q Sensitivity
42 Pages Posted: 3 Oct 2016 Last revised: 1 Aug 2018
Date Written: November 24, 2016
We consider the effect of the agency problem between firm managers and shareholders on corporate investment. We derive investment regressions from a model of investment in which managers, who have control over corporate investment, have a preference to under- or overinvest. We show that these regressions are better-specified than traditional investment-q regressions, as they have significantly more explanatory power, and no investment-cashflow sensitivity. Our results show that executive compensation is used to combat managers' preference to underinvest, managers are more likely to underinvest at low levels of q and equity incentives are more powerful when investment incentives are low.
Keywords: CEO Compensation, Corporate Investment, Q Theory
JEL Classification: G32, E22
Suggested Citation: Suggested Citation