Does Long-Term Orientation in Executive Compensation Foster Investment Efficiency?

• In Event: Governance and Managerial Ability

Abstract

I examine whether long-term orientation in executive compensation influences investment
decisions. I exploit a compensation regulation designed to foster long-term
sustainability as exogenous trigger to lengthen contractual performance assessment
and vesting periods. It appears that treated firms invest more efficiently after the act
as they have lower levels of abnormal investment. This result is robust to different
measures of investment as well as several models of expected investment. Further
analyses suggest that the lower abnormal investment stems to a higher extent from
reductions in over-investment. I conclude that long-term orientation has a positive
impact on real behavior regarding capital investments. My study contributes to
our understanding of the economic consequences of long-term incentives and the
determinants of corporate investment efficiency.

Author

• Matthias Christopher Regier, TUM School of Management