Agency and Corporate Investment: The Role of Executive Compensation and Corporate Governance

Sok-Hyon Kang, Praveen Kumar and Hyunkoo Lee
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Sok-Hyon Kang: George Washington University
Praveen Kumar: University of Houston
Hyunkoo Lee: Hong Kong University of Science and Technology

Journal of Business, 2006, vol. 79, issue 3, pages 1127-1148

Abstract: The agency theory of the firm implies that executive incentive compensation and corporate investment policies are endogenously determined. We estimate jointly the relationship between long-term corporate investment and CEO incentive compensation structure, while considering the strength of corporate governance mechanisms. The analysis indicates that long-term business investment is positively related to the weight placed on equity-based incentive compensation, after controlling for internal financing constraints and the quality of the investment opportunity set. We also confirm that CEO compensation structure is influenced by factors that represent the strength of the firm's internal governance mechanisms.

Date: 2006

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Persistent link: http://EconPapers.repec.org/RePEc:ucp:jnlbus:v:79:y:2006:i:3:p:1127-1148

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