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The Effect of Bonus Deferral on Managers’ Investment Decisions.

Sat, October 7, 10:30am to 12:00pm, TBA

Abstract

We examine the impact of deferred bonus payments and employment horizon on managers’ investment decisions. Deferred bonus is an important element of a “bonus bank” scheme designed to mitigate managers’ tendency to avoid long-term investments that can reduce their bonuses (the problem of managerial myopia). Consistent with Construal Level Theory from psychology, we find that bonus deferral increases managers’ willingness to make a bonus-decreasing investment. This is driven by managers placing greater importance on advancing their company’s long-term interests and on improving their reputation within the company. These mediation effects are significant only when participants have a short employment horizon. Our study contributes to the debate on effective managerial compensation by showing that a simple deferral of bonus payments can reduce the negative consequences related to managerial myopia.

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