Does Executive Compensation Affect Investment?

Kevin J. Murphy and Robert Gibbons

No 4135, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Investment decisions require trading off current expenditures against future revenues. If revenues extend far enough into the future, the executives responsible for designing long-run investment policy may no longer be in office by the time all the revenues are realized. We present evidence that: (1) on average, executives are close to leaving office (relative to the payout period of many investments); (2) bonuses based on accounting earnings constitute an important part of compensation for the typical executive; and (3) executives respond in predictable ways to compensation plans based on accounting measures of earnings. Based on these facts, we hypothesize that existing compensation policy induces executives to reduce investments during their last years in office. In our empirical work, however, we find that investment expenditures on research and development and on advertising tend to be largest in the final years of a CEO's time in office. We offer several possible explanations for this surprising finding

Date: 1992-08
Note: CF LS
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Citations: View citations in EconPapers (27)

Published as Journal of Applied Corporate Finance, Vol. 5, No. 2, pp. 99-109 (Summer 1992)

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Journal Article: DOES EXECUTIVE COMPENSATION AFFECT INVESTMENT? (1992)
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