CEO Ownership and Discretionary Investments

21 Pages Posted: 11 Jul 2007

See all articles by Al (Aloke) Ghosh

Al (Aloke) Ghosh

UNC Charlotte

Doocheol Moon

SUNY at Old Westbury - School of Business

Kishore Tandon

CUNY Baruch College - Zicklin School of Business

Abstract

This study investigates empirically the relationship between CEO ownership and discretionary investments such as R&D and capital expenditures. We assert that the under-investment problem is high for R&D-intensive projects, while the over-investment problem is high for capital expenditures because of differences in risk between the two types of investments. Building on the linkages between investments and investment-related agency problems, we hypothesize that the relationship between CEO ownership and investments depends on whether increasing ownership mitigates or exacerbates the under- or over-investment problem. We find a non-linear association between CEO stock ownership and R&D investments; R&D investments increase and then decline across increasing levels of ownership. Further, we find that R&D investments and CEO stock options are positively associated at high levels of option holdings. In contrast, capital expenditures do not vary with CEO ownership (stock or options). Finally, consistent with our underlying assumption, we find that the influence of R&D investments on future firm risk is significantly larger than that of capital expenditures. Our findings indicate that managerial risk aversion affects discretionary investments.

JEL Classification: G32, G31, G34

Suggested Citation

Ghosh, Al (Aloke) and Moon, Doocheol and Tandon, Kishore, CEO Ownership and Discretionary Investments. Journal of Business Finance & Accounting, Vol. 34, Nos. 5-6, pp. 819-839, June/July 2007, Available at SSRN: https://ssrn.com/abstract=999769 or http://dx.doi.org/10.1111/j.1468-5957.2007.02011.x

Al (Aloke) Ghosh (Contact Author)

UNC Charlotte ( email )

9201 University City Blvd
Charlotte, NC 28223
United States

HOME PAGE: http://www.alokeghosh.com

Doocheol Moon

SUNY at Old Westbury - School of Business ( email )

Old Westbury, NY 11568-0210
United States

Kishore Tandon

CUNY Baruch College - Zicklin School of Business ( email )

55 Lexington Avenue
New York, NY 10010
United States
(646) 312-3468 (Phone)
(646) 312-3451 (Fax)

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