Empire-Builders and Shirkers: Investment, Firm Performance, and Managerial Incentives / Rajesh K. Aggarwal, Andrew A. Samwick.

Format:

Book

Author/Creator:

Aggarwal, Rajesh K.

Contributor:

National Bureau of Economic Research.

Samwick, Andrew A.

Series:

Working Paper Series (National Bureau of Economic Research) no. w7335.

NBER working paper series no. w7335

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Empire-Builders and Shirkers

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1999.

Summary:

Do firms systematically over- or underinvest as a result of agency problems? We develop a contracting model between shareholders and managers in which managers have private benefits or private costs of investment. Managers overinvest when they have private benefits and underinvest when they have private costs. Optimal incentive contracts mitigate the over- or underinvestment problem. We derive comparative static predictions for the equilibrium relationships between incentives from compensation, investment, and firm performance for both cases. The relationship between firm performance and managerial incentives, in isolation, is insufficient to identify whether managers have private benefits or private costs of investment. In order to identify whether managers have private benefits or costs, we estimate the joint relationships between incentives and firm performance and between incentives and investment. Our empirical results show that both firm performance and investment are increasing in managerial incentives. These results are consistent with managers having private costs of investment. We find no support for overinvestment based on private benefits.

Notes:

Print version record

September 1999.