Uncertainty, investment, and managerial incentives

Brent Glover and Oliver Levine

Journal of Monetary Economics, 2015, vol. 69, issue C, 121-137

Abstract: This study provides evidence that managerial incentives, shaped by compensation contracts, help to explain the empirical relationship between uncertainty and investment. We develop a model in which the manager, compensated with an equity-based contract, makes investment decisions for a firm that faces time-varying volatility. The contract creates incentives that affect both the sign and magnitude of a manager׳s optimal response to volatility shocks. The model is calibrated using compensation data to quantify this predicted investment response for a large panel of firms. Our estimates help explain the variation in firm-level investment responses to volatility shocks observed in the data.

Keywords: Corporate investment; Uncertainty; Agency conflicts; Executive compensation; Idiosyncratic volatility (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (30)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:69:y:2015:i:c:p:121-137

DOI: 10.1016/j.jmoneco.2014.11.004

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