CEO Ownership and Discretionary Investments |
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| Authors: | Aloke Ghosh Doocheol Moon Kishore Tandon |
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| Institution: | The first and third authors are from Zicklin School of Business, Baruch College, The City University of New York. The second author is from the School of Business, Yonsei University. They thank Armen Hovakimian, Lee-Seok Hwang, Darius Palia, Andrew Stark (editor), Ashok Vora, an anonymous referee, and seminar participants at the 2002 FMA annual meetings and the 2002 Washington Area Finance Conference for their helpful comments and suggestions. |
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| Abstract: | Abstract: This study investigates empirically the relationship between CEO ownership and discretionary investments such as R&D and capital expenditures. We assert that the under-investment problem is high for R&D-intensive projects, while the over-investment problem is high for capital expenditures because of differences in risk between the two types of investments. Building on the linkages between investments and investment-related agency problems, we hypothesize that the relationship between CEO ownership and investments depends on whether increasing ownership mitigates or exacerbates the under- or over-investment problem. We find a non-linear association between CEO stock ownership and R&D investments; R&D investments increase and then decline across increasing levels of ownership. Further, we find that R&D investments and CEO stock options are positively associated at high levels of option holdings. In contrast, capital expenditures do not vary with CEO ownership (stock or options). Finally, consistent with our underlying assumption, we find that the influence of R&D investments on future firm risk is significantly larger than that of capital expenditures. Our findings indicate that managerial risk aversion affects discretionary investments. |
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| Keywords: | ownership structure firm investments agency problems managerial risk aversion firm risk |
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