Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
967422 | Journal of Monetary Economics | 2015 | 17 Pages |
Abstract
This study provides evidence that managerial incentives, shaped by compensation contracts, help to explain the empirical relationship between uncertainty and investment. We develop a model in which the manager, compensated with an equity-based contract, makes investment decisions for a firm that faces time-varying volatility. The contract creates incentives that affect both the sign and magnitude of a manager׳s optimal response to volatility shocks. The model is calibrated using compensation data to quantify this predicted investment response for a large panel of firms. Our estimates help explain the variation in firm-level investment responses to volatility shocks observed in the data.
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Authors
Brent Glover, Oliver Levine,