Empire-builders and shirkers: Investment,firm performance,and managerial incentives |
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| Institution: | 1. Department of Economics and Finance & Research Institute for Business, Hang Seng Management College, Hang Shin Link, Siu Lek Yuen, Shatin, Hong Kong;2. Department of Finance and Insurance, Lingnan University, 8 Castle Peak Road, Tuen Mun, Hong Kong;1. School of Economics, Huazhong University of Science and Technology, Wuhan 430074, China;2. Department of Accounting, Jinan University, Guangzhou, China;3. School of Economics, Huazhong University of Science and Technology, Wuhan 430074, China;1. University of Warwick, Warwick Business School, Coventry CV4 7AL, United Kingdom;2. Indiana University, Kelley School of Business, Bloomington IN 47405, United States;3. University of North Carolina, Kenan-Flagler Business School, Chapel Hill NC 27599, United States |
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| Abstract: | We consider the equilibrium relationships between incentives from compensation, investment, and firm performance. In an optimal contracting model, we show that the relationship between firm performance and managerial incentives, in isolation, is insufficient to identify whether managers have private benefits of investment, as in theories of managerial entrenchment. We estimate the joint relationships between incentives and firm performance and between incentives and investment. We provide new results showing that investment is increasing in incentives. Further, in contrast to previous studies, we find that firm performance is increasing in incentives at all levels of incentives. Taken together, these results are inconsistent with theories of overinvestment based on managers having private benefits of investment. These results are consistent with managers having private costs of investment and, more generally, models of underinvestment. |
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