Form of Compensation and Managerial Decision Horizon
44 Pages Posted: 9 Jan 1996
There are 2 versions of this paper
Form of Compensation and Managerial Decision Horizon
Form of Compensation and Managerial Decision Horizon
Date Written: April 1995
Abstract
This paper investigates the relation between the form of compensation and the manager's decision horizon. It finds that while all-cash contracts induce managers to underinvest in the long-term, all-stock contracts induce overinvestment in the long-term. It shows that compensation contracts consisting of both cash and restricted stock can produce efficient investment, thereby providing a rationale for the existence of both cash and stock incentive schemes in executive compensation packages. This explains why the adoption of either type of incentive scheme results in a positive stock price reaction. In addition, the paper derives the following testable hypotheses: (i) the proportion of the stock compensation is decreasing in the precision of the manager's ability and increasing in the precision of the firm's cash flows; (ii) firms compensate their managers with proportionately more stock in profitable years and proportionately more cash in leaner years; (iii) the greater the growth opportunities the higher the proportion of stock compensation.
JEL Classification: G30, J33
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Do Institutional Investors Prefer Near-Term Earnings Over Long-Run Value?
-
Do Institutional Investors Exacerbate Managerial Myopia?
By John J. Mcconnell and Sunil Wahal
-
By Jeffery S. Abarbanell, Brian J. Bushee, ...
-
The Myth of the Patient Japanese: Corporate Myopia and Financial Distress in Japan and the Us
By Brian J. Hall and David E. Weinstein
-
Vote by Foot: Investor Impatience and Corporate Governance
By Julan Du
-
Earnings Management by Changing R&D Expenditure: Evidence on the Role of CEO Stock Compensation
By Frank He, Bin Srinidhi, ...