Capital (Mis)allocation, Incentives and Productivity

Jan Schymik (), Matthias Meier, Alexander Schramm () and Alexander Schwemmer ()

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: This paper studies how managerial pay shapes the allocation of capital within firms. We leverage quasi-experimental variation in the composition of managerial pay between cash bonuses and equity compensation. We find that a relative increase in cash bonuses leads firms to reallocate capital toward less durable investment projects. To rationalize the empirical evidence, we develop a quantitative model with agency frictions. In the model, a relative increase in cash bonuses strengthens managerial short-termism, which shifts the investment composition toward less durable projects. The observed change in managerial pay exacerbates within-firm capital misallocation and leads to a sizeable contraction in output.

Keywords: Investment; Firms; Managerial Pay; Capital Misallocation. (search for similar items in EconPapers)
JEL-codes: D25 E22 E32 G31 (search for similar items in EconPapers)
Pages: 58
Date: 2025-01
New Economics Papers: this item is included in nep-cfn, nep-eff, nep-hrm and nep-ppm
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