The Role of Equity Compensation in Reducing Inefficient Investment in Labor

43 Pages Posted: 17 Aug 2017

Date Written: April 15, 2017

Abstract

We examine whether equity compensation incentivizes managers to make efficient labor investment decisions. Specifically, we examine whether and how the components of equity compensation – stock options and restricted stock – affect over- (under-) investment in labor. We find that stock options exacerbate (mitigate) over-investment (under-investment) in labor, while, suggesting that giving stock options to managers encourages (discourages) them to over- (under-) invest in labor. In contrast, restricted stock mitigates both over-investment and under-investment in labor, so granting restricted stock to managers discourages them from over- and under-investing. Our results are consistent after controlling for managerial ability and corporate governance. Overall, our research demonstrates that stock options and restricted stock matter in managers’ labor investment decisions.

Keywords: Over-investment, under-investment, labor, stock options, restricted stock, agency, human capital, empire-building, risk-aversion

Suggested Citation

Sualihu, Mohammed Aminu and Rankin, Michaela and Haman, Janto, The Role of Equity Compensation in Reducing Inefficient Investment in Labor (April 15, 2017). 30th Australasian Finance and Banking Conference 2017, Available at SSRN: https://ssrn.com/abstract=3020490

Mohammed Aminu Sualihu (Contact Author)

Monash University ( email )

Caulfield Campus
Sir John Monash Drive
Caulfield East, Victoria 3145
Australia
+61 3 9903 4997 (Phone)

Michaela Rankin

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Janto Haman

Monash University ( email )

Caulfield, Victoria 3145
Australia

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