CEO Incentives, Cash Flow, and Investment

John Broussard, Sheree A. Buchenroth and Eugene A. Pilotte

Financial Management, 2004, vol. 33, issue 2

Abstract: We estimate the impact of chief executive officer (CEO) incentives on the sensitivity of investment to cash flow during a period of strong economic growth. Our measure of the alignment of managers’ and shareholders’ interests, pay-performance sensitivity (PPS), incorporates both stock and stock option holdings. Contrary to prior studies, we find that the dominant effect of increasing alignment is to reduce the overinvestment of free cash flow. We find no evidence that incentives exacerbate the severity of financial constraints. We find some evidence that PPS helps reduce the underinvestment of cash flow due to managerial shirking.

Date: 2004
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Persistent link: https://EconPapers.repec.org/RePEc:fma:fmanag:broussardbuchenrothpilotte04

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