Can CEO equity‐based compensation limit investment‐related agency problems?

Abstract

Previous research suggests that investment‐cash flow sensitivity (ICS) has arisen from agency costs. This study investigates whether equity‐based compensation (EBC) reduces these costs. We find that ICS is lower when companies grant EBC to chief executive officers (CEOs). EBC with long‐term vesting periods, and especially with graded vesting conditions, is associated with a lower ICS. EBC with performance hurdles is associated with higher sensitivity. However, when the performance hurdles are set as a relative market index rather than an absolute target, the sensitivity becomes lower. Our results suggest that appropriately designed EBC plays an important role in mitigating investment‐related agency problems.

Strengthening Corporate Cash Holdings and Investment Efficiency in the COVID-19 Pandemic: Some Empirical Evidence from Indonesia Emerging Markets

“…The study employs ordinary least squares regression to examine the hypotheses [45,47,53], incorporating fixed effects from industrial years and combined standard error [23]. Two different research models are utilized to test the hypotheses.…”

“…Financial distress affects the payment processes within and outside the firm and has implications for firms' investment decisions, financing choices, and dividend distributions [34,35,47]. The allocation of cash by firms to long-term assets (such as fixed assets) and short-term assets reflects their investment choices, which play a crucial role in stimulating firm growth.…”

“…The level of cash reserves held by firms significantly influences their investment decisions. Maintaining an optimal cash holding level helps mitigate agency problems and information asymmetry, thereby promoting investment efficiency [4,9,10,46,47]. By having an optimal cash position, firms are better prepared to navigate economic uncertainties like the COVID-19 pandemic.…”

The impact of accounting comparability on CEO incentive plans in an emerging economy: the moderating role of board independence

“…Previous research suggests that investment-cash flow sensitivity has arisen from agency costs, and it is lower when companies grant equity-based compensation to CEOs. Appropriately designed equity-based compensation plays an important role in mitigating investment-related agency problems (Qu et al ., 2022). Equity-based compensation addresses the long-term consequences of managers' actions (Baber et al ., 1998) and lengthens managers' decision horizon and motivates them to focus more on activities that increase value in the long-term (Jensen and Murphy, 1990).…”

Sikap Penghindaran Pajak, Strategi Pendanaan dan Manajemen Laba Perusahaan

“…Menurut teori keagenan, konflik kepentingan antara principal dan agen terjadi ketika mereka mempunyai keinginan untuk memaksimalkan kekayaan sendiri, hal ini dapat menciptakan masalah keagenan (Jensen & Meckling, 1976). Manajemen sebagai pengelola perusahaan memiliki informasi yang lebih banyak dan lebih cepat dalam mendapatkan informasi tentang kondisi perusahaan daripada pemegang saham (Qu et al, 2021).…”