Managerial Incentives and Investment Policy in Family Firms: Evidence from a Structural Analysis

40 Pages Posted: 24 Sep 2018

See all articles by Betty H.T. Wu

Betty H.T. Wu

University of Glasgow Adam Smith Business School

Mieszko Mazur

Catholic University of Lille - IESEG School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: October 2018

Abstract

This paper provides evidence that CEO incentive pay mediates the effect of family preferences on corporate investment policy. Our study focuses on the option portfolio volatility sensitivity vega, which motivates the risk‐taking behavior of undiversified managers. After controlling for factors that affect incentive pay and investment policy simultaneously, we find that one‐third of underinvestment in riskier R&D projects in active family firms can be attributed to a significantly lower vega. Passive family firms allocate more capital to R&D as opposed to active family firms, and are more active in M&A deal making. In contrast to many prior studies, pay incentives and families are not associated with capital expenditures. Overall, our empirical results suggest that CEO pay incentives induce investment policy contingent on firm risk. Family CEO incentive pay manifests the family preference for lower risk, especially in firms with higher firm risk. Nonetheless, after replacing family CEOs with outside professionals, investments in both R&D and M&A increase, which is consistent with the family preference for extended investment horizons. Interestingly, such a preference seems not to be manifested in incentive pay.

Suggested Citation

Wu, Betty H.T. and Mazur, Mieszko, Managerial Incentives and Investment Policy in Family Firms: Evidence from a Structural Analysis (October 2018). Journal of Small Business Management, Vol. 56, Issue 4, pp. 618-657, 2018. Available at SSRN: https://ssrn.com/abstract=3253300 or http://dx.doi.org/10.1111/jsbm.12308

Betty H.T. Wu (Contact Author)

University of Glasgow Adam Smith Business School ( email )

Glasgow, Scotland
United Kingdom

Mieszko Mazur

Catholic University of Lille - IESEG School of Management ( email )

3 Rue de la Digue
Office: A321
Puteaux, 92800
France

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