Does Executive Compensation Affect Investment?

23 Pages Posted: 4 May 2007 Last revised: 7 Apr 2010

See all articles by Robert Gibbons

Robert Gibbons

affiliation not provided to SSRN; National Bureau of Economic Research (NBER)

Kevin J. Murphy

University of Southern California - Marshall School of Business; USC Gould School of Law

Date Written: August 1992

Abstract

Investment decisions require trading off current expenditures against future revenues. If revenues extend far enough into the future, the executives responsible for designing long-run investment policy may no longer be in office by the time all the revenues are realized. We present evidence that: (1) on average, executives are close to leaving office (relative to the payout period of many investments); (2) bonuses based on accounting earnings constitute an important part of compensation for the typical executive; and (3) executives respond in predictable ways to compensation plans based on accounting measures of earnings. Based on these facts, we hypothesize that existing compensation policy induces executives to reduce investments during their last years in office. In our empirical work, however, we find that investment expenditures on research and development and on advertising tend to be largest in the final years of a CEO's time in office. We offer several possible explanations for this surprising finding

Suggested Citation

Gibbons, Robert and Murphy, Kevin J., Does Executive Compensation Affect Investment? (August 1992). NBER Working Paper No. w4135, Available at SSRN: https://ssrn.com/abstract=981138

Robert Gibbons

affiliation not provided to SSRN

No Address Available

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Kevin J. Murphy (Contact Author)

University of Southern California - Marshall School of Business ( email )

BRI 308, MC 0804
Los Angeles, CA 90089-0804
United States
213-740-6553 (Phone)
213-740-6650 (Fax)

USC Gould School of Law

699 Exposition Boulevard
Los Angeles, CA 90089
United States

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