Uncertainty in Executive Compensation and Capital Investment: A Panel Study

Atreya Chakraborty (), Mark Vahram Kazarosian () and Emery Trahan
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Emery Trahan: Northeastern University

No 434, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: We test whether uncertainty in the CEO's compensation influences the firm's investment decisions, using panel compensation data and cross-sectional invetsment data. Given the prospect of bearing extra risk, a rational agent reacts to minimize the impact of such risk. We provide evidence that CEOs with high earnings uncertainty invest less. As expected, the negative impact of permanent earnings uncertainty on firm investment is larger than that of transitory earnings uncertainty. The results are robust to several alternative specifications and lend support to Stulz' over-investment hypothesis. Knowing how investment is tied to the CEO's earnings uncertainty helps in building the correct compensation package.

Keywords: executive compensation; capital investment; uncertainty (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-fin and nep-lab
Date: 1999-07-12
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