INVESTOR SENTIMENT,EXECUTIVE COMPENSATION, AND CORPORATE INVESTMENTDr Hui (Michael) LiDepartment of Economics and FinanceLa Trobe University
AgendaContribution of the paperLiterature reviewThe modelThe empirical testConclusion
Contribution of the paperTheoretical contributionThe paper develops a model that incorporates ownership structure, investor sentiment, and executive compensation into the investigation for corporate investment decisions.
Empirical contributionThe paper shows that when managerial compensation only includes options and vested shares, for the sample of CEOs, the investment level is significantly associated with the weight on options, and generally increases with the proxies for investor sentiment. For the sample of all top executives, the investment level generally increases with the proxies for investor sentiment, but is not significantly associated with the options and shares. when managerial compensation includes options, restricted shares and vested shares, for both the sample of CEOs and top executives, the investment level generally increases with the proxies for investor sentiment, but is not significantly associated with the executive compensation.
Literature reviewSV: Shleifer and Vishny. PS: Polk and Sapienza. GHH: Gilchrist, Himmelberg, and Huberman. BSX: Bolton, Sheiken, and Xiong.
Sheet1
Table 2.9 Empirical tests on Executive Compensation and Corporate Investment: Methodologies
Sample sizeIndustriesPeriodType of investmentMethodology
A M (1987)209 firmsAll1974-1982AcquisitionEvent study
D S (1991)91 firmsManufacturing1974-1988R&D investmentOLS regression
BJK(1996)1249 firmsAll except banking and utility1993Investment opportunityOLS regression
AS (1999)1494 firmsAll1993-1997InvestmentSpline regression (OLS and fixed effects)
DDR(2001)1719 acquisitionsAll1993-1998AcquisitionEvent study&OLS regression
Table 2.3 Empirical Tests on Investor Sentiment and Corporate Investment: Methodology and Data
Sample sizeIndustriesPeriodType of investmentMethodology
MSV (1990)All Compustat firmsAll1959-1987Investment excluding acquisitionOLS regression
N/AAll1934-1988Fixed, nonresidential private investmentOLS regression
BRS (1993)All Compustat firmsNon-financial1900-1990Aggregate investmentOLS regression
Lamont (2000)N/ANon-financial1948-1993Aggregate investmentOLS regression
G Y (2001)Janpanese listed firmsAll except banking and utility1981-1994InvestmentOLS regression
C S (2001)N/AAll1966-1992Aggregate investmentOLS regression, system of equations
BSW(2003)All Compustat firmsNon-financial1980-1999InvestmentPooled regression
P S (2004)All Compustat firmsAll1963-2000InvestmentPooled regression
GHH (2004)All Compustat firmsAll1986-2000InvestmentVAR
Table 2.9 Empirical Tests on Institutional Ownership and Corporate Investment: Methodology and Data
Sample sizeIndustriesPeriodType of investmentMethodology
Graves (1988)32Computer1976-1985R&DOLS regression
BKS(1991)176All1981-1983R&DOLS regression
HH (1991)129aerospace, chemicals,1977-1987R&DOLS regression
computers, and pharmaceuticals
Bushee (1998)30324 firm-yearAll1983-1994R&DLogit regression
WM (2000)2500All excluding financial firms1966-1992PP&E, R&Dtwo-stage OLS regression
Sheet2
Table 2.10: Empirical Tests on Executive Compensation and Corporate Investment: Results
Dependent variablesIndependent variablesSign or findings
AM (1987)Stock and option/total compensationVariances of the firms after the acquisitionPositive
Stock and option/Salary and bonusPositive
Manager's stock ownershipPositive(insignificant)
D S (1991)Change in R&D expenses(Stock+o.6*options)*stock price/(salary+bonus)Positive
A S (1999)Investment/capitalStock+option/shares outstandingPositive
DDR (2001)New options/total compensationAcquisition premiumPositive
Two-day CARPositive
Three-year BHARPositive
Two-day CARTotal options+stock/shares outstandingPositive
New options/total compensationPositive
OwnershipPositive(insignificant)
Previous options/shares outstandingPositive(insignificant)
Three-year BHARTotal options+stock/shares outstandingPositive(insignificant)
New options/total compensationPositive
OwnershipMixed
Previous options/shares outstandingMixed
Table 2.4 Empirical Tests on Investor Sentiment and Corporate Investment: Results
Dependent variablesMain independent variablesSign or finding
MSV (1990)Growth in real investmentstock return , sales, cash flowsThe incremental explanatory power of the share
(aggregate level and firm level)(aggregate level and firm level)price change is samll after controlling fundamentals
BRS(1993)Change in log(Investment/capial)change in log(Q),log(profit)Share market plays limites role in invstment decision
Lamont (2000)Stock returninvestment plan growth,Investment plan positively covaries with current
Investment/capital,equity issuancereturns and negatively covaries with future returns
mispricing does not affect the predicting power
G Y (2001)Investment/capitalQ, Cash flow/capitalMispricing significantly affects investment during
asset shocks
C S (2001)Investment/capitalBubble compoenent of share priceBubbles affect fixed investment
BSW(2003)Investment/assetQ, Cash flow/capital, KZ inedexStock price has a greater impact on the investment
of equity-dependent firms
P S (2004)Investment/capitalMispricing proxiesoverpriced (underpriced) firms tend to overinvest
(accrual, share issuance, and momentum)(underinvest)
GHH(2004)Investment/capital, marginal profit of capitalInvestment/capital, marginal profit of capitalDispersion affects investment
standard deviation of analyst forecaststandard deviation of analyst forecast
DHRT (2004)Bid premium, CARPrice/Book,Price/residual income valueMisvaluation is an important driver of the takeover
LS (2005)Net issuance, Investment/capitalaggregate return, Q, firm return, QEquity issuance and merger are more sensitive to
aggregate stock prices than to firm-level prices
Hu(1995)Aggregate returnVariance of market, log price, aggregate QMarket volatility affects investment
Table 2.10 Empirical Tests on Institutional Ownership and Corporate Investment: Results
Dependent variablesMain independent variablesRelation between investment and ownership
Graves (1988)R&Dinstitutional ownership, profit to sales ratioNegative
BKS(1991)R&Dpercentage of outsider director,positive raltion between institutional owneship and investment
institutional ownership, diversification
HH (1991)R&Dinsider ownership, institutional ownershipweak positive raltion between institutional owneship and investment
cash flow, size, market sharel, leverageresults for insider ownershuip are mixed
Bushee (1998)R&Dinsitutional ownership, insider ownershippositive raltion between institutional owneship and investment
Q, cash flow, leverageresults for insider ownershuip are mixed
WM (2000)R&D, PP&Einsitutional ownership,positive raltion between institutional owneship and investment
Q, cash flow, leverage, firm size
Sheet4
Table 2.6: Predictions of the Models on Share Price and Corporate Investments
Stein (1996)If the manager is interested in maximizing current tock price, she must cater to the investors sentiment.
If the manager is interested in maximizing long run tock price, she will use a hurdle rate that reflects the
fundamental risk. Share issues and repurchases also affect the hurdle rate.
SV(2003)Firm with overvalued equity might be able to acquire firms with undervalued or less overvalued equity
PS (2004)When the firm is overpriced (underpriced), the manager overinvests (underinvests). The incentive to
overinvest (underinvest) increases with the duration of the mispricing and decreases with the horizon
of the average shareholder.
GHH(2004)An increase in dispersion in shareholder's beliefs increases the size of the bubble, new share issue
and the investment level.
BSX(2005)The speculative component of stock price can create distortion in CEO compensation leading to
overinvest in short-term speculative projects at the expense of long-term fundamental value.
Models of Investor Sentiment and Corporate Investments
Stein (1996)SV (2003)PS (2006)GHH (2004)BSX (2006)
Manager's goal?Managers maximizesManagers maximizesManagers maximizesManagers maximizesManagers maximizes
old shareholder's valueold shareholder's valueold shareholder's valueold shareholder's valueold shareholder's value
Firm's value depends onInvestment+mispricing+Investment(acquisition)+Investment+mispricing+Investment+mispricingInvestment+mispricing+
capital structuremispricingshareholder's horizonmanager's effort
Investment choicesinvestment leveltake over?investment levelinvestment levelshort-term vs. long-term
Information asymetryN/AN/AN/AN/AManager's action
Managerial contractNoNoNoNoLinear in share prices
Risk preferenceManager:N/AN/AManager:N/AManager:N/AManager-risk averse
Investor: Risk-neutralN/AInvestor: Risk-neutralInvestor: Risk-neutralInvestor: Risk-neutral
Manager's utilityN/AN/AN/AN/AExponential
RationalityManager is rationalManager is rationalManager is rationalManager is rationalManager is rational
Investor is irrationalInvestor is irrationalInvestor is irrationalInvestor is irrationalInvestor is irrational
Sheet3
Table 2.2: Predictions of the Models on Managerial Incentive and Corporate Investment
Narayan (1985)The manager may have incentives to make decisions that will increase the short-term share price at the expense of long-term value.
The long-term contract cannot totally eliminate this short-term incentives.
BS (1993)Short-term objective of the manager plus the information asymmetry may lead not only to underinvestment but also to overinvestment
in long-run projects. When the market cannot observe the investment level, underinvestment occurs. When the market cannot observe
the productivity of the investment, overinvestment occurs.
Narayan (1996)If the managerial ability and the investment level are unknown to shareholders, then cash-only contract results in underinvestment in
long-term projects. Stock-based contract results in overinvestment in long-term projects.
AS (1999)If there are private benefits, an increase in incentives is associated with an increase in investment. If there are private costs, an increase
in incentives is associated with a decrease in investment.
Table 2.1: Models on Managerial Incentive and Corporate Investment
Narayan (1985)BS (1993)Narayan (1996)AS (1999)
Principle-Agent?YesManger maximizesYesYes
own utility
Firm's value depends onAbility + investmentInvestmentAbility + investmentInvestment
Investment choicesshort term vs. long termShort term vs. long termInvestment levelinvestment level
Investment level
Information asymmetryAbilityInvestment levelAbilityInvestment level
Investment levelInvestment productivityInvestment level
Managerial contrct ?NoLinear in firm's valueCash, stock, andCash+profit bonus
stock+cash
Risk preferenceManger:risk-neutralManger:risk-neutralManger:risk-neutralManger:risk-averse
Investor:risk-neutralInvestor:risk-neutralInvestor:risk-neutral
Manager's utilityLinearLinearLinearExponential(CARA)
Investor's sentiment?NoNoNoNo
MSV: Morck, Shleifer, and Vishny. BRS: Blanchard, Rhee, and Summers. GY: Goyal and Yamada. CS: Chirinko and Schaler. BSW: Baker, Stein, and Wurgler. GHH: Gilchrist, Himmelberg, and Huberman. PS: Polk and Sapienza. The more recent evidence supports the theory that mispricing affects investment.
Sheet1
Table 2.9 Empirical tests on Executive Compensation and Corporate Investment: Methodologies
Sample sizeIndustriesPeriodType of investmentMethodology
A M (1987)209 firmsAll1974-1982AcquisitionEvent study
D S (1991)91 firmsManufacturing1974-1988R&D investmentOLS regression
BJK(1996)1249 firmsAll except banking and utility1993Investment opportunityOLS regression
AS (1999)1494 firmsAll1993-1997InvestmentSpline regression (OLS and fixed effects)
DDR(2001)1719 acquisitionsAll1993-1998AcquisitionEvent study&OLS regression
Table 2.3 Empirical Tests on Investor Sentiment and Corporate Investment: Methodologies and Data
Sample sizeIndustriesPeriodType of investmentMethodology
MSV (1990)All Compustat firmsAll1959-1987Investment excluding acquisitionOLS regression
N/AAll1934-1988Fixed, nonresidential private investmentOLS regression
BRS (1993)All Compustat firmsNon-financial1900-1990Aggregate investmentOLS regression
Lamont (2000)N/ANon-financial1948-1993Aggregate investmentOLS regression
G Y (2001)Janpanese listed firmsAll except banking and utility1981-1994InvestmentOLS regression
C S (2001)N/AAll1966-1992Aggregate investmentOLS regression, system of equations
BSW(2003)All Compustat firmsNon-financial1980-1999InvestmentPooled regression
P S (2004)All Compustat firmsAll1963-2000InvestmentPooled regression
GHH (2004)All Compustat firmsAll1986-2000InvestmentVAR
Table 2.9 Empirical Tests on Institutional Ownership and Corporate Investment: Methodology and Data
Sample sizeIndustriesPeriodType of investmentMethodology
Graves (1988)32Computer1976-1985R&DOLS regression
BKS(1991)176All1981-1983R&DOLS regression
HH (1991)129aerospace, chemicals,1977-1987R&DOLS regression
computers, and pharmaceuticals
Bushee (1998)30324 firm-yearAll1983-1994R&DLogit regression
WM (2000)2500All excluding financial firms1966-1992PP&E, R&Dtwo-stage OLS regression
Sheet2
Table 2.10: Empirical Tests on Executive Compensation and Corporate Investment: Results
Dependent variablesIndependent variablesSign or findings
AM (1987)Stock and option/total compensationVariances of the firms after the acquisitionPositive
Stock and option/Salary and bonusPositive
Manager's stock ownershipPositive(insignificant)
D S (1991)Change in R&D expenses(Stock+o.6*options)*stock price/(salary+bonus)Positive
A S (1999)Investment/capitalStock+option/shares outstandingPositive
DDR (2001)New options/total compensationAcquisition premiumPositive
Two-day CARPositive
Three-year BHARPositive
Two-day CARTotal options+stock/shares outstandingPositive
New options/total compensationPositive
OwnershipPositive(insignificant)
Previous options/shares outstandingPositive(insignificant)
Three-year BHARTotal options+stock/shares outstandingPositive(insignificant)
New options/total compensationPositive
OwnershipMixed
Previous options/shares outstandingMixed
Empirical Tests on Share Price and Corporate Investment: Results
Dependent variablesMain independent variablesSign or finding
MSV (1990)Growth in real investmentstock return , sales, cash flowsThe incremental explanatory power of the share
(aggregate level and firm level)(aggregate level and firm level)price change is samll after controlling fundamentals
BRS(1993)Change in log(Investment/capial)change in log(Q),log(profit)Share market plays limites role in invstment decision
Lamont (2000)Stock returninvestment plan growth,Investment plan positively covaries with current
Investment/capital,equity issuancereturns and negatively covaries with future returns
mispricing does not affect the predicting power
G Y (2001)Investment/capitalQ, Cash flow/capitalMispricing significantly affects investment during
asset shocks
C S (2001)Investment/capitalBubble compoenent of share priceBubbles affect fixed investment
BSW(2003)Investment/assetQ, Cash flow/capital, KZ inedexStock price has a greater impact on the investment
of equity-dependent firms
P S (2004)Investment/capitalMispricing proxiesoverpriced (underpriced) firms tend to overinvest
(accrual, share issuance, and momentum)(underinvest)
GHH(2004)Investment/capital, marginal profit of capitalInvestment/capital, marginal profit of capitalDispersion affects investment
standard deviation of analyst forecaststandard deviation of analyst forecast
DHRT (2004)Bid premium, CARPrice/Book,Price/residual income valueMisvaluation is an important driver of the takeover
LS (2005)Net issuance, Investment/capitalaggregate return, Q, firm return, QEquity issuance and merger are more sensitive to
aggregate stock prices than to firm-level prices
Hu(1995)Aggregate returnVariance of market, log price, aggregate QMarket volatility affects investment
Table 2.10 Empirical Tests on Institutional Ownership and Corporate Investment: Results
Dependent variablesMain independent variablesRelation between investment and ownership
Graves (1988)R&Dinstitutional ownership, profit to sales ratioNegative
BKS(1991)R&Dpercentage of outsider director,positive raltion between institutional owneship and investment
institutional ownership, diversification
HH (1991)R&Dinsider ownership, institutional ownershipweak positive raltion between institutional owneship and investment
cash flow, size, market sharel, leverageresults for insider ownershuip are mixed
Bushee (1998)R&Dinsitutional ownership, insider ownershippositive raltion between institutional owneship and investment
Q, cash flow, leverageresults for insider ownershuip are mixed
WM (2000)R&D, PP&Einsitutional ownership,positive raltion between institutional owneship and investment
Q, cash flow, leverage, firm size
Sheet4
Table 2.2: Predictions of the Models on Investor Sentiment and Corporate Investments
Stein (1996)If the manager is interested in maximizing current tock price, she must cater to the investors sentiment.
If the manager is interested in maximizing long run tock price, she will use a hurdle rate that reflects the
fundamental risk. Share issues and repurchases also affect the hurdle rate.
SV(2003)Firm with overvalued equity might be able to acquire firms with undervalued or less overvalued equity
PS (2004)When the firm is overpriced (underpriced), the manager overinvests (underinvests). The incentive to
overinvest (underinvest) increases with the duration of the mispricing and decreases with the horizon
of the average shareholder.
GHH(2004)An increase in dispersion in shareholder's beliefs increases the size of the bubble, new share issue
and the investment level.
BSX(2005)The speculative component of stock price can create distortion in CEO compensation leading to
overinvest in short-term speculative projects at the expense of long-term fundamental value.
Table 2.1: Models on Investor Sentiment and Corporate Investments
Stein (1996)SV (2003)PS (2006)GHH (2004)BSX (2006)
Manager's goal?Managers maximizesManagers maximizesManagers maximizesManagers maximizesManagers maximizes
old shareholder's valueold shareholder's valueold shareholder's valueold shareholder's valueold shareholder's value
Firm's value depends onInvestment+mispricing+Investment(acquisition)+Investment+mispricing+Investment+mispricingInvestment+mispricing+
capital structuremispricingshareholder's horizonmanager's effort
Investment choicesinvestment leveltake over?investment levelinvestment levelshort-term vs. long-term
Information asymetryN/AN/AN/AN/AManager's action
Managerial contractNoNoNoNoLinear in share prices
Risk preferenceManager:N/AN/AManager:N/AManager:N/AManager-risk averse
Investor: Risk-neutralN/AInvestor: Risk-neutralInvestor: Risk-neutralInvestor: Risk-neutral
Manager's utilityN/AN/AN/AN/AExponential
RationalityManager is rationalManager is rationalManager is rationalManager is rationalManager is rational
Investor is irrationalInvestor is irrationalInvestor is irrationalInvestor is irrationalInvestor is irrational
Sheet3
Table 2.2: Predictions of the Models on Managerial Incentive and Corporate Investment
Narayan (1985)The manager may have incentives to make decisions that will increase the short-term share price at the expense of long-term value.
The long-term contract cannot totally eliminate this short-term incentives.
BS (1993)Short-term objective of the manager plus the information asymmetry may lead not only to underinvestment but also to overinvestment
in long-run projects. When the market cannot observe the investment level, underinvestment occurs. When the market cannot observe
the productivity of the investment, overinvestment occurs.
Narayan (1996)If the managerial ability and the investment level are unknown to shareholders, then cash-only contract results in underinvestment in
long-term projects. Stock-based contract results in overinvestment in long-term projects.
AS (1999)If there are private benefits, an increase in incentives is associated with an increase in investment. If there are private costs, an increase
in incentives is associated with a decrease in investment.
Table 2.1: Models on Managerial Incentive and Corporate Investment
Narayan (1985)BS (1993)Narayan (1996)AS (1999)
Principle-Agent?YesManger maximizesYesYes
own utility
Firm's value depends onAbility + investmentInvestmentAbility + investmentInvestment
Investment choicesshort term vs. long termShort term vs. long termInvestment levelinvestment level
Investment level
Information asymmetryAbilityInvestment levelAbilityInvestment level
Investment levelInvestment productivityInvestment level
Managerial contrct ?NoLinear in firm's valueCash, stock, andCash+profit bonus
stock+cash
Risk preferenceManger:risk-neutralManger:risk-neutralManger:risk-neutralManger:risk-averse
Investor:risk-neutralInvestor:risk-neutralInvestor:risk-neutral
Manager's utilityLinearLinearLinearExponential(CARA)
Investor's sentiment?NoNoNoNo
BKS: Baysinger, Kosnik, and Turl. AS stands for Aggarwal and SamwickTheoretical models and empirical evidence suggest that there is a significant relationship between executive compensation and corporate investment.
Sheet1
Table 2.9 Empirical tests on Executive Compensation and Corporate Investment: Methodologies
Sample sizeIndustriesPeriodType of investmentMethodology
A M (1987)209 firmsAll1974-1982AcquisitionEvent study
D S (1991)91 firmsManufacturing1974-1988R&D investmentOLS regression
BJK(1996)1249 firmsAll except banking and utility1993Investment opportunityOLS regression
AS (1999)1494 firmsAll1993-1997InvestmentSpline regression (OLS and fixed effects)
DDR(2001)1719 acquisitionsAll1993-1998AcquisitionEvent study&OLS regression
Table 2.3 Empirical Tests on Investor Sentiment and Corporate Investment: Methodologies and Data
Sample sizeIndustriesPeriodType of investmentMethodology
MSV (1990)All Compustat firmsAll1959-1987Investment excluding acquisitionOLS regression
N/AAll1934-1988Fixed, nonresidential private investmentOLS regression
BRS (1993)All Compustat firmsNon-financial1900-1990Aggregate investmentOLS regression
Lamont (2000)N/ANon-financial1948-1993Aggregate investmentOLS regression
G Y (2001)Janpanese listed firmsAll except banking and utility1981-1994InvestmentOLS regression
C S (2001)N/AAll1966-1992Aggregate investmentOLS regression, system of equations
BSW(2003)All Compustat firmsNon-financial1980-1999InvestmentPooled regression
P S (2004)All Compustat firmsAll1963-2000InvestmentPooled regression
GHH (2004)All Compustat firmsAll1986-2000InvestmentVAR
Table 2.5 Empirical Tests on Institutional Ownership and Corporate Investment: Methodology and Data
Sample sizeIndustriesPeriodType of investmentMethodology
Graves (1988)32Computer1976-1985R&DOLS regression
BKS(1991)176All1981-1983R&DOLS regression
HH (1991)129aerospace, chemicals,1977-1987R&DOLS regression
computers, and pharmaceuticals
Bushee (1998)30324 firm-yearAll1983-1994R&DLogit regression
WM (2000)2500All excluding financial firms1966-1992PP&E, R&Dtwo-stage OLS regression
Sheet2
Table 2.10: Empirical Tests on Executive Compensation and Corporate Investment: Results
Dependent variablesIndependent variablesSign or findings
AM (1987)Stock and option/total compensationVariances of the firms after the acquisitionPositive
Stock and option/Salary and bonusPositive
Manager's stock ownershipPositive(insignificant)
D S (1991)Change in R&D expenses(Stock+o.6*options)*stock price/(salary+bonus)Positive
A S (1999)Investment/capitalStock+option/shares outstandingPositive
DDR (2001)New options/total compensationAcquisition premiumPositive
Two-day CARPositive
Three-year BHARPositive
Two-day CARTotal options+stock/shares outstandingPositive
New options/total compensationPositive
OwnershipPositive(insignificant)
Previous options/shares outstandingPositive(insignificant)
Three-year BHARTotal options+stock/shares outstandingPositive(insignificant)
New options/total compensationPositive
OwnershipMixed
Previous options/shares outstandingMixed
Table 2.4 Empirical Tests on Share Price and Corporate Investment: Results
Dependent variablesMain independent variablesSign or finding
MSV (1990)Growth in real investmentstock return , sales, cash flowsThe incremental explanatory power of the share
(aggregate level and firm level)(aggregate level and firm level)price change is samll after controlling fundamentals
BRS(1993)Change in log(Investment/capial)change in log(Q),log(profit)Share market plays limites role in invstment decision
Lamont (2000)Stock returninvestment plan growth,Investment plan positively covaries with current
Investment/capital,equity issuancereturns and negatively covaries with future returns
mispricing does not affect the predicting power
G Y (2001)Investment/capitalQ, Cash flow/capitalMispricing significantly affects investment during
asset shocks
C S (2001)Investment/capitalBubble compoenent of share priceBubbles affect fixed investment
BSW(2003)Investment/assetQ, Cash flow/capital, KZ inedexStock price has a greater impact on the investment
of equity-dependent firms
P S (2004)Investment/capitalMispricing proxiesoverpriced (underpriced) firms tend to overinvest
(accrual, share issuance, and momentum)(underinvest)
GHH(2004)Investment/capital, marginal profit of capitalInvestment/capital, marginal profit of capitalDispersion affects investment
standard deviation of analyst forecaststandard deviation of analyst forecast
DHRT (2004)Bid premium, CARPrice/Book,Price/residual income valueMisvaluation is an important driver of the takeover
LS (2005)Net issuance, Investment/capitalaggregate return, Q, firm return, QEquity issuance and merger are more sensitive to
aggregate stock prices than to firm-level prices
Hu(1995)Aggregate returnVariance of market, log price, aggregate QMarket volatility affects investment
Table 2.6 Empirical Tests on Institutional Ownership and Corporate Investment: Results
Dependent variablesMain independent variablesRelation between investment and ownership
Graves (1988)R&Dinstitutional ownership, profit to sales ratioNegative
BKS(1991)R&Dpercentage of outsider director,positive raltion between institutional owneship and investment
institutional ownership, diversification
HH (1991)R&Dinsider ownership, institutional ownershipweak positive raltion between institutional owneship and investment
cash flow, size, market sharel, leverageresults for insider ownershuip are mixed
Bushee (1998)R&Dinsitutional ownership, insider ownershippositive raltion between institutional owneship and investment
Q, cash flow, leverageresults for insider ownershuip are mixed
WM (2000)R&D, PP&Einsitutional ownership,positive raltion between institutional owneship and investment
Q, cash flow, leverage, firm size
Sheet4
Table 2.2: Predictions of the Models on Investor Sentiment and Corporate Investments
Stein (1996)If the manager is interested in maximizing current tock price, she must cater to the investors sentiment.
If the manager is interested in maximizing long run tock price, she will use a hurdle rate that reflects the
fundamental risk. Share issues and repurchases also affect the hurdle rate.
SV(2003)Firm with overvalued equity might be able to acquire firms with undervalued or less overvalued equity
PS (2004)When the firm is overpriced (underpriced), the manager overinvests (underinvests). The incentive to
overinvest (underinvest) increases with the duration of the mispricing and decreases with the horizon
of the average shareholder.
GHH(2004)An increase in dispersion in shareholder's beliefs increases the size of the bubble, new share issue
and the investment level.
BSX(2005)The speculative component of stock price can create distortion in CEO compensation leading to
overinvest in short-term speculative projects at the expense of long-term fundamental value.
Table 2.1: Models on Investor Sentiment and Corporate Investments
Stein (1996)SV (2003)PS (2006)GHH (2004)BSX (2006)
Manager's goal?Managers maximizesManagers maximizesManagers maximizesManagers maximizesManagers maximizes
old shareholder's valueold shareholder's valueold shareholder's valueold shareholder's valueold shareholder's value
Firm's value depends onInvestment+mispricing+Investment(acquisition)+Investment+mispricing+Investment+mispricingInvestment+mispricing+
capital structuremispricingshareholder's horizonmanager's effort
Investment choicesinvestment leveltake over?investment levelinvestment levelshort-term vs. long-term
Information asymetryN/AN/AN/AN/AManager's action
Managerial contractNoNoNoNoLinear in share prices
Risk preferenceManager:N/AN/AManager:N/AManager:N/AManager-risk averse
Investor: Risk-neutralN/AInvestor: Risk-neutralInvestor: Risk-neutralInvestor: Risk-neutral
Manager's utilityN/AN/AN/AN/AExponential
RationalityManager is rationalManager is rationalManager is rationalManager is rationalManager is rational
Investor is irrationalInvestor is irrationalInvestor is irrationalInvestor is irrationalInvestor is irrational
Sheet3
Table 2.2: Predictions of the Models on Managerial Incentive and Corporate Investment
Narayan (1985)The manager may have incentives to make decisions that will increase the short-term share price at the expense of long-term value.
The long-term contract cannot totally eliminate this short-term incentives.
BS (1993)Short-term objective of the manager plus the information asymmetry may lead not only to underinvestment but also to overinvestment
in long-run projects. When the market cannot observe the investment level, underinvestment occurs. When the market cannot observe
the productivity of the investment, overinvestment occurs.
Narayan (1996)If the managerial ability and the investment level are unknown to shareholders, then cash-only contract results in underinvestment in
long-term projects. Stock-based contract results in overinvestment in long-term projects.
AS (1999)If there are private benefits, an increase in incentives is associated with an increase in investment. If there are private costs, an increase
in incentives is associated with a decrease in investment.
Models of Managerial Incentive and Corporate Investment
Narayan (1985)BS (1993)Narayan (1996)AS (1999)
Principle-Agent?YesManger maximizesYesYes
own utility
Firm's value depends onAbility + investmentInvestmentAbility + investmentInvestment
Investment choicesshort term vs. long termShort term vs. long termInvestment levelinvestment level
Investment level
Information asymmetryAbilityInvestment levelAbilityInvestment level
Investment levelInvestment productivityInvestment level
Managerial contract ?NoLinear in firm's valueCash, stock, andCash+profit bonus
stock+cash
Risk preferenceManger:risk-neutralManger:risk-neutralManger:risk-neutralManger:risk-averse
Investor:risk-neutralInvestor:risk-neutralInvestor:risk-neutral
Manager's utilityLinearLinearLinearExponential(CARA)
Investor's sentiment?NoNoNoNo
AM: Agrawal and Mandelker. DS: Dechow and Sloan. AS: Aggarwal and Samwick. DDR: Datta. Iskandar-Datta, and Raman. CAR is cumulative abnormal return, BHAR is buy-and-hold abnormal return
Sheet1
Table 2.9 Empirical tests on Executive Compensation and Corporate Investment: Methodologies
Sample sizeIndustriesPeriodType of investmentMethodology
A M (1987)209 firmsAll1974-1982AcquisitionEvent study
D S (1991)91 firmsManufacturing1974-1988R&D investmentOLS regression
BJK(1996)1249 firmsAll except banking and utility1993Investment opportunityOLS regression
AS (1999)1494 firmsAll1993-1997InvestmentSpline regression (OLS and fixed effects)
DDR(2001)1719 acquisitionsAll1993-1998AcquisitionEvent study&OLS regression
Table 2.3 Empirical Tests on Investor Sentiment and Corporate Investment: Methodology and Data
Sample sizeIndustriesPeriodType of investmentMethodology
MSV (1990)All Compustat firmsAll1959-1987Investment excluding acquisitionOLS regression
N/AAll1934-1988Fixed, nonresidential private investmentOLS regression
BRS (1993)All Compustat firmsNon-financial1900-1990Aggregate investmentOLS regression
Lamont (2000)N/ANon-financial1948-1993Aggregate investmentOLS regression
G Y (2001)Janpanese listed firmsAll except banking and utility1981-1994InvestmentOLS regression
C S (2001)N/AAll1966-1992Aggregate investmentOLS regression, system of equations
BSW(2003)All Compustat firmsNon-financial1980-1999InvestmentPooled regression
P S (2004)All Compustat firmsAll1963-2000InvestmentPooled regression
GHH (2004)All Compustat firmsAll1986-2000InvestmentVAR
Table 2.9 Empirical Tests on Institutional Ownership and Corporate Investment: Methodology and Data
Sample sizeIndustriesPeriodType of investmentMethodology
Graves (1988)32Computer1976-1985R&DOLS regression
BKS(1991)176All1981-1983R&DOLS regression
HH (1991)129aerospace, chemicals,1977-1987R&DOLS regression
computers, and pharmaceuticals
Bushee (1998)30324 firm-yearAll1983-1994R&DLogit regression
WM (2000)2500All excluding financial firms1966-1992PP&E, R&Dtwo-stage OLS regression
Sheet2
Empirical Tests on Executive Compensation and Corporate Investment: Results
Dependent variablesIndependent variablesSign or findings
AM (1987)Stock and option/total compensationVariances of the firms after the acquisitionPositive
Stock and option/Salary and bonusPositive
Manager's stock ownershipPositive(insignificant)
D S (1991)Change in R&D expenses(Stock+o.6*options)*stock price/(salary+bonus)Positive
A S (1999)Investment/capitalStock+option/shares outstandingPositive
DDR (2001)New options/total compensationAcquisition premiumPositive
Two-day CARPositive
Three-year BHARPositive
Two-day CARTotal options+stock/shares outstandingPositive
New options/total compensationPositive
OwnershipPositive(insignificant)
Previous options/shares outstandingPositive(insignificant)
Three-year BHARTotal options+stock/shares outstandingPositive(insignificant)
New options/total compensationPositive
OwnershipMixed
Previous options/shares outstandingMixed
Table 2.4 Empirical Tests on Investor Sentiment and Corporate Investment: Results
Dependent variablesMain independent variablesSign or finding
MSV (1990)Growth in real investmentstock return , sales, cash flowsThe incremental explanatory power of the share
(aggregate level and firm level)(aggregate level and firm level)price change is samll after controlling fundamentals
BRS(1993)Change in log(Investment/capial)change in log(Q),log(profit)Share market plays limites role in invstment decision
Lamont (2000)Stock returninvestment plan growth,Investment plan positively covaries with current
Investment/capital,equity issuancereturns and negatively covaries with future returns
mispricing does not affect the predicting power
G Y (2001)Investment/capitalQ, Cash flow/capitalMispricing significantly affects investment during
asset shocks
C S (2001)Investment/capitalBubble compoenent of share priceBubbles affect fixed investment
BSW(2003)Investment/assetQ, Cash flow/capital, KZ inedexStock price has a greater impact on the investment
of equity-dependent firms
P S (2004)Investment/capitalMispricing proxiesoverpriced (underpriced) firms tend to overinvest
(accrual, share issuance, and momentum)(underinvest)
GHH(2004)Investment/capital, marginal profit of capitalInvestment/capital, marginal profit of capitalDispersion affects investment
standard deviation of analyst forecaststandard deviation of analyst forecast
DHRT (2004)Bid premium, CARPrice/Book,Price/residual income valueMisvaluation is an important driver of the takeover
LS (2005)Net issuance, Investment/capitalaggregate return, Q, firm return, QEquity issuance and merger are more sensitive to
aggregate stock prices than to firm-level prices
Hu(1995)Aggregate returnVariance of market, log price, aggregate QMarket volatility affects investment
Table 2.10 Empirical Tests on Institutional Ownership and Corporate Investment: Results
Dependent variablesMain independent variablesRelation between investment and ownership
Graves (1988)R&Dinstitutional ownership, profit to sales ratioNegative
BKS(1991)R&Dpercentage of outsider director,positive raltion between institutional owneship and investment
institutional ownership, diversification
HH (1991)R&Dinsider ownership, institutional ownershipweak positive raltion between institutional owneship and investment
cash flow, size, market sharel, leverageresults for insider ownershuip are mixed
Bushee (1998)R&Dinsitutional ownership, insider ownershippositive raltion between institutional owneship and investment
Q, cash flow, leverageresults for insider ownershuip are mixed
WM (2000)R&D, PP&Einsitutional ownership,positive raltion between institutional owneship and investment
Q, cash flow, leverage, firm size
Sheet4
Table 2.6: Predictions of the Models on Share Price and Corporate Investments
Stein (1996)If the manager is interested in maximizing current tock price, she must cater to the investors sentiment.
If the manager is interested in maximizing long run tock price, she will use a hurdle rate that reflects the
fundamental risk. Share issues and repurchases also affect the hurdle rate.
SV(2003)Firm with overvalued equity might be able to acquire firms with undervalued or less overvalued equity
PS (2004)When the firm is overpriced (underpriced), the manager overinvests (underinvests). The incentive to
overinvest (underinvest) increases with the duration of the mispricing and decreases with the horizon
of the average shareholder.
GHH(2004)An increase in dispersion in shareholder's beliefs increases the size of the bubble, new share issue
and the investment level.
BSX(2005)The speculative component of stock price can create distortion in CEO compensation leading to
overinvest in short-term speculative projects at the expense of long-term fundamental value.
Table 2.5: Models on Share Price and Corporate Investments
Stein (1996)SV (2003)PS (2006)GHH (2004)BSX (2006)
Manager's goal?Managers maximizesManagers maximizesManagers maximizesManagers maximizesManagers maximizes
old shareholder's valueold shareholder's valueold shareholder's valueold shareholder's valueold shareholder's value
Firm's value depends onInvestment+mispricing+Investment(acquisition)+Investment+mispricing+Investment+mispricingInvestment+mispricing+
capital structuremispricingshareholder's horizonmanager's effort
Investment choicesinvestment leveltake over?investment levelinvestment levelshort-term vs. long-term
Information asymetryN/AN/AN/AN/AManager's action
Managerial contractNoNoNoNoLinear in share prices
Risk preferenceManager:N/AN/AManager:N/AManager:N/AManager-risk averse
Investor: Risk-neutralN/AInvestor: Risk-neutralInvestor: Risk-neutralInvestor: Risk-neutral
Manager's utilityN/AN/AN/AN/AExponential
RationalityManager is rationalManager is rationalManager is rationalManager is rationalManager is rational
Investor is irrationalInvestor is irrationalInvestor is irrationalInvestor is irrationalInvestor is irrational
Sheet3
Table 2.2: Predictions of the Models on Managerial Incentive and Corporate Investment
Narayan (1985)The manager may have incentives to make decisions that will increase the short-term share price at the expense of long-term value.
The long-term contract cannot totally eliminate this short-term incentives.
BS (1993)Short-term objective of the manager plus the information asymmetry may lead not only to underinvestment but also to overinvestment
in long-run projects. When the market cannot observe the investment level, underinvestment occurs. When the market cannot observe
the productivity of the investment, overinvestment occurs.
Narayan (1996)If the managerial ability and the investment level are unknown to shareholders, then cash-only contract results in underinvestment in
long-term projects. Stock-based contract results in overinvestment in long-term projects.
AS (1999)If there are private benefits, an increase in incentives is associated with an increase in investment. If there are private costs, an increase
in incentives is associated with a decrease in investment.
Table 2.1: Models on Managerial Incentive and Corporate Investment
Narayan (1985)BS (1993)Narayan (1996)AS (1999)
Principle-Agent?YesManger maximizesYesYes
own utility
Firm's value depends onAbility + investmentInvestmentAbility + investmentInvestment
Investment choicesshort term vs. long termShort term vs. long termInvestment levelinvestment level
Investment level
Information asymmetryAbilityInvestment levelAbilityInvestment level
Investment levelInvestment productivityInvestment level
Managerial contrct ?NoLinear in firm's valueCash, stock, andCash+profit bonus
stock+cash
Risk preferenceManger:risk-neutralManger:risk-neutralManger:risk-neutralManger:risk-averse
Investor:risk-neutralInvestor:risk-neutralInvestor:risk-neutral
Manager's utilityLinearLinearLinearExponential(CARA)
Investor's sentiment?NoNoNoNo
The model
At time 0, the firm has an investment opportunity. The investment outlay is
. At time 1, the firm is liquidated and the projects payoff, plus any cash remaining, will be distributed to the shareholders. The projects payoff is
. The production function
is concave and its form is known to all shareholders.
is normally distributed with mean zero and variance
.
_1204226874.unknown
_1204707872.unknown
_1218040741.unknown
_1204226982.unknown
_1203154703.unknown
The informed investors belief about the projects payoff The uninformed investors belief about the projects payoff The uninformed investors belief about the projects payoff
The firm can issue unlimited liability debt to finance the project. The total number of investors is N and the fraction of informed investor is . For simplicity, the interest rate is assumed to be zero. Each investor has negative exponential utility with constant risk aversion.The supply of the shares is normalized to 1. Under these assumptions, one can solve for the optimal demand for the uninformed investor and informed investorrespectively.
where
, and that
is normally distributed with mean zero and variance
, where
. Together
and
indicate the sentiment of the uninformed investors .
_1205253228.unknown
_1205253440.unknown
_1205253452.unknown
_1208794994.unknown
_1205253272.unknown
_1204290438.unknown
An example of the relation between investment level, the marginal production and the NPV of the project
the X axis is the investment level. The solid line is the production payoff ((
), the dot line is the projects NPV (
), and the thick dash line is the marginal production (
). As shown in the graph, the NPV is at its maximum when the investment is equal to 0.2 and
=1 at this point. When the investment level is greater than 0.2, the NPV decreases with the investment and
. When the investment level is less than 0.2, the NPV increases with the investment and
.
_1282236346.unknown
_1282238102.unknown
_1282238161.unknown
_1282236381.unknown
_1282235709.unknown
Chart1
0.200853545310.15085354534
0.29485427110.21485427112.5
0.33948298140.23948298142
0.35854501740.24854501741.8181818182
0.37594729280.25594729281.6666666667
0.40677742870.26677742871.4285714286
0.4205760030.2705760031.3333333333
0.43348370730.27348370731.25
0.45704031440.27704031441.1111111111
0.47811241750.27811241751
0.52274112780.27274112780.8
0.55920543910.25920543910.6666666667
0.61674185360.21674185360.5
0.66137056390.16137056390.4
0.69783487520.09783487520.3333333333
0.72866501120.02866501120.2857142857
0.7553712897-0.04462871030.25
0.7789278969-0.12107210310.2222222222
I
R(I)
R(I)-I
R'(I)
I
I, R(I), R'(I) and R(I)-I
Sheet1
0.050.080.10.110.120.140.150.160.180.20.250.30.40.50.60.70.80.9
0.20085354530.29485427110.33948298140.35854501740.37594729280.40677742870.4205760030.43348370730.45704031440.47811241750.52274112780.55920543910.61674185360.66137056390.69783487520.72866501120.75537128970.7789278969
0.15085354530.21485427110.23948298140.24854501740.25594729280.26677742870.2705760030.27348370730.27704031440.27811241750.27274112780.25920543910.21674185360.16137056390.09783487520.0286650112-0.0446287103-0.1210721031
42.521.81818181821.66666666671.42857142861.33333333331.251.111111111110.80.66666666670.50.40.33333333330.28571428570.250.2222222222
Sheet1
0100
000
000
000
000
000
000
000
000
000
000
000
000
000
000
000
000
000
I
R(I)
R(I)-I
R'(I)
I
I, R(I), R'(I) and R(I)-I
Sheet2
Sheet3
Case1: A manager maximized current share price
Observation 1: If
,
_1223297944.unknown
_1266781717.unknown
Observation 2:
is decreasing in
.
_1218144009.unknown
_1266781647.unknown
Observation 3: If
,
.
_1218144345.unknown
_1266781855.unknown
Observation 4: If
,
.
_1218144345.unknown
_1266781947.unknown
Observation 5: If
,
.
_1218144345.unknown
_1266782072.unknown
Case 2: A manager maximizes her own compensationSalary plus restricted shares with long maturitySalary plus options with long maturitySalary plus long-term options plus vested and non-vested shares
Salary plus vested shares plus non-vested restricted shares
Salary plus long-term options plus vested shares
The empirical testThe hypothesesHypothesis 1: If a managers compensation contract only includes options and the managers have vested shares, then the investment level can be increasing or decreasing with the weight on options (shares), and the investment level should increase with investor sentiment. Hypothesis 2: If a managers compensation contract includes options and restricted shares and if the manager has vested shares, then the investment level can be increasing or decreasing with the weight on options (shares), and the investment level should increase with investor sentiment.
The empirical testThe mispricing proxiesDiscretionary accrualsShare turnover ratioDispersion of analyst forecasts of earning per sharePast net equity issuanceDatabase includes Compustat, CRSP, IBES and Thompson Reuters. Time period is between 1992 and 2005.
Discretionary accruals is given byThe dispersion of analyst forecast is given by Shares turnover ratio is calculated as the average monthly ratio of shares traded to shares outstanding. Net equity issuance is the average of the current years net equity issuance and the past two years net equity issuance, scaled by last years net PPE.
comp
Executive Compensation and Corporate Investment (Top Executives)
Panel A
(1)(2)(3)(4)
OP0.0016OP0.0067OP0.0056OP0.0032
[0.71][2.76][0.75][1.67]
DACCR0.0340TURN0.4491DISP-10.0068EQISS0.0504
[4.27]8.5600[1.08][5.07]
Q-10.0492Q-10.0497Q-10.0502Q-10.0397
[15.76][18.77][17][13.81]
CF0.0351CF0.0429CF0.0518CF0.0395
[8.86][16.48][16.18][12.75]
CASH-10.0163CASH-10.0165CASH-10.0178CASH-10.0150
[11.63][19.54][17.09][14.74]
SHROWN-0.0002SHROWN0.0011SHROWN0.0008SHROWN-0.0002
[-0.26][1.41][0.82][-0.19]
OP*DACCR-0.0004OP*TURN-0.0286OP*DISP-10.0006OP*EQISS0.0014
[-0.24][-3.23][0.49][0.88]
Firm-year5411Firm-year8859Firm-year6584Firm-year7061
R square0.2943R square0.4468R square0.3656R square0.4010
Panel B
(1)(2)(3)(4)
OP0.0008OP0.0012OP-0.0028OP0.0021
[0.3][0.4][-0.25][0.92]
RSH-0.0044RSH0.0007RSH0.0471RSH-0.0004
[-1.42][0.17][1.6][0.11]
DACCR0.0168TURN0.0654DISP-1-0.0094EQISS0.0904
[2][1.18][-1.71][6.55]
Q-10.0305Q-10.0294Q-10.0242Q-10.0316
[8.45][8.54][6.66][8.17]
CF0.0627CF0.0568CF0.0734CF0.0689
[11.42][14.43][13.98][15.52]
CASH-10.0298CASH-10.0143CASH-10.0123CASH-10.0032
[11.49][11.3][7.15][2.13]
SHROWN-0.0004SHROWN0.0016SHROWN0.0021SHROWN0.0007
[-0.3][1.47][1.32][0.58]
OP*DACCR0.0005OP*TURN0.0054OP*DISP-1-0.0012OP*EQISS-0.0057
[0.21][0.37][-0.72][-1.71]
RSH*DACCR-0.0152RSH*TURN-0.0659RSH*DISP-10.0086RSH*EQISS-0.0137
[-1.64][-1.19][1.98][-3.79]
Firm-year3237Firm-year4885Firm-year3704Firm-year4018
R square0.3349R square0.3589R square0.3076R square0.3729
Table 4.29: Executive Compensation and Corporate Investment
Panel A
(1)(2)(3)(4)
OP-0.0046OP0.0131OP0.0311OP0.0085418
[-0.99][2.66][1.98][2.21]
DACCR0.0156TURN0.3803DISP-10.0039EQISS0.0607688
[1.72][6.9][0.6][5.26]
Q-10.0462Q-10.0473Q-10.0472Q-10.0363091
[13.52][16.36][14.83][11.36]
CF0.0372CF0.0396CF0.0535CF0.0399153
[7.94][13.02][13.93][11.15]
CASH-10.0172CASH-10.0152CASH-10.0199CASH-10.0122764
[10.56][15.5][15.56][10.28]
SHROWN-0.0000SHROWN0.0018SHROWN0.0010SHROWN-0.0007751
[0][1.46][0.68][-0.58]
OP*DACCR0.0030OP*TURN-0.0425OP*DISP-10.0033OP*EQISS-0.0035611
[0.95][-2.41][1.31][-1.11]
Firm-year4501Firm-year6975Firm-year5239Firm-year5608
R square0.2967R square0.4175R square0.3590R square0.3780
Panel B
(1)(2)(3)(4)
OP-0.0037OP0.0025OP-0.0205OP-0.0015049
[-0.74][0.43][-0.84][-0.29]
RSH-0.0051RSH-0.0007RSH0.3167RSH-0.003032
[-1.31][-0.11][3.03][-0.47]
DACCR0.0312TURN0.2395DISP-1-0.0112EQISS0.0458068
[3.35][3.68][-1.88][2.44]
Q-10.0341Q-10.0284Q-10.0218Q-10.0342061
[8.06][7.4][5.46][7.62]
CF0.0726CF0.0519CF0.0692CF0.0534596
[11.54][11.54][10.68][10.12]
CASH-10.0186CASH-10.0110CASH-10.0114CASH-10.0032424
[6.18][7.44][5.45][1.82]
SHROWN-0.0006SHROWN-0.0006SHROWN-0.0011SHROWN0.0008422
[-0.29][-0.29][-0.41][0.34]
OP*DACCR-0.0010OP*TURN-0.0371OP*DISP-1-0.0042OP*EQISS0.0076947
[-0.21][-1.41][-1.2][0.64]
RSH*DACCR-0.0496RSH*TURN-0.0690RSH*DISP-10.0474RSH*EQISS-0.0204789
[-2.7][-0.67][3.18][-2.2]
Firm-year2289Firm-year3447Firm-year2624Firm-year2846
R square0.3619R square0.3533R square0.3153R square0.3361
Table 4.28: Managerial incentives and firm investment
Panel A
(1)(2)(3)(4)
OP-0.0015OP0.0072OP0.0061OP0.0047
[-0.58][2.7][0.7][2.16]
DACCR0.0286TURN0.3600DISP0.0089EQISS0.0173
[3.19][6.22][1.24][1.47]
Q-10.0481Q-10.0468Q-10.0454Q-10.0417
[13.16][15.56][13.56][12.18]
CF0.0258CF0.0409CF0.0525CF0.0357
[5.43][13.65][13.83][10.11]
CASH0.0149CASH0.0148CASH0.0157CASH0.0124
[8.7][13.86][11.77][9.8]
SHROWN0.0009SHROWN0.0008SHROWN-0.0000SHROWN-0.0004
[0.92][0.97][0][-0.47]
OP*DACCR0.0007OP*TURN-0.0144OP*DISP0.0001OP*EQISS0.0063
[0.42][-1.45][0.1][3.39]
Q-20.0002Q-20.0004Q-20.0040Q-20.0040
[0.05][0.14][1.25][1.25]
Firm-year4353Firm-year7314Firm-year5285Firm-year5735
R square0.2681R square0.4426R square0.3840R square0.3670
Panel B
(1)(2)(3)(4)
OP0.0017OP0.0018OP0.0046OP0.0020
[0.64][0.54][0.36][0.81]
RSH-0.0050RSH-0.0005RSH0.0479RSH0.0002
[-1.58][-0.11][0.86][0.04]
DACCR0.0268TURN0.0835DISP-0.0122DISP0.0956
[2.85][1.43][-1.92][6.34]
Q-10.0320Q-10.0284Q-10.0214Q-10.0400
[7.35][6.89][4.82][8.71]
CF0.0582CF0.0513CF0.0696CF0.0653
[9.59][12.12][11.64][13.69]
CASH0.0183CASH0.0158CASH0.0132CASH0.0028
[6.32][11.37][6.42][1.69]
SHROWN-0.0012SHROWN0.0011SHROWN0.0015SHROWN-0.0001
[-0.9][0.96][0.84][-0.08]
OP*DACCR0.0020OP*TURN0.0053OP*DISP-0.0004OP*EQISS-0.0113
[0.7][0.34][-0.23][-3.1]
RSH*DACCR-0.0387RSH*TURN-0.0280RSH*DISP0.0075RSH*EQISS-0.0121
[-3.19][-0.41][0.9][-2.81]
Q-20.0011Q-20.0045Q-20.0068Q-2-0.0089
[0.27][1.16][1.61][-2.08]
Firm-year2785Firm-year4299Firm-year3193Firm-year3447
R square0.3049R square0.3461R square0.3378R square0.3387
Table 4.29: Managerial incentives and firm investment
Panel A
(1)(2)(3)(4)
OP-0.0022OP0.0067OP0.0198OP0.0019
[-0.8][2.29][1.9][0.78]
DACCR0.0135TURN0.3200DISP-0.0032EQISS-0.0088
[1.37][4.93][-0.39][-0.63]
Q-10.0469Q-10.0402Q-10.0348Q-10.0367
[11.25][11.92][9.07][9.59]
CF0.0300CF0.0344CF0.0525CF0.0331
[5.77][10.32][11.6][8.34]
CASH0.0117CASH0.0167CASH0.0176CASH0.0162
[5.92][13.12][10.64][10.96]
SHROWN0.0013SHROWN0.0014SHROWN0.0012SHROWN0.0003
[1.15][1.44][1.05][0.26]
OP*DACCR0.0028OP*TURN-0.0127OP*DISP0.0025OP*EQISS0.0106
[1.53][-1.14][1.5][4.81]
Q-20.0022Q-20.0039Q-20.0079Q-20.0026
[0.54][1.24][2.23][0.71]
Q-3-0.0064Q-3-0.0087Q-3-0.0116Q-3-0.0120
[-1.65][-2.97][-3.49][-3.57]
Firm-year3457Firm-year5914Firm-year4158Firm-year4574
R square0.1894R square0.3926R square0.3347R square0.3173
Panel B
(1)(2)(3)(4)
OP0.0017OP0.0017OP-0.0065OP0.0053
[0.57][0.44][-0.44][1.92]
RSH0.0089RSH-0.0012RSH0.1822RSH-0.0001
[0.83][-0.25][2.19][-0.01]
DACCR-0.0043TURN0.0469DISP-0.0108EQISS0.0656
[-1.3][0.75][-1.47][3.86]
Q-10.0309Q-10.0259Q-10.0166Q-10.0391
[6.64][5.81][3.39][7.87]
CF0.0518CF0.0469CF0.0664CF0.0605
[7.8][10.32][9.96][11.72]
CASH0.0332CASH0.0176CASH0.0121CASH0.0039
[7.24][10.82][5.32][1.81]
SHROWN-0.0017SHROWN0.0003SHROWN0.0013SHROWN-0.0013
[-1.1][0.24][0.6][-0.82]
OP*DACCR0.0035OP*TURN0.0072OP*DISP-0.0022OP*EQISS-0.0007
[1.1][0.43][-1.01][-0.17]
RSH*DACCR-0.0292RSH*TURN-0.0048RSH*DISP0.0269RSH*EQISS-0.0014
[-2.25][-0.06][2.27][-0.14]
Q-20.0072Q-20.0087Q-20.0101Q-2-0.0086
[1.51][1.92][2.01][-1.66]
Q-3-0.0033Q-30.0004Q-30.0028Q-30.0058
[-0.78][0.11][0.61][1.31]
Firm-year2347Firm-year3726Firm-year2701Firm-year2921
R square0.2452R square0.3253R square0.3579R square0.3883
Table 4.30: Managerial incentives and firm investment
Panel A
(1)(2)(3)(4)
OP-0.0103OP0.0104OP0.0455OP0.0089
[-1.96][1.9][2.45][1.99]
DACCR0.0184TURN0.2854DISP-0.0075EQISS0.0453
[1.84][4.76][-103][3.18]
Q-10.0446Q-10.0461Q-10.0443Q-10.0385
[11.42][13.74][12.09][10.11]
CF0.0346CF0.0381CF0.0605CF0.0434
[6.33][10.74][12.67][10.46]
CASH0.0167CASH0.0142CASH0.0166CASH0.0091
[8.33][11.62][10.25][6.21]
SHROWN-0.0005SHROWN0.0007SHROWN0.0010SHROWN-0.0016
[-0.26][0.5][0.61][-1.01]
OP*DACCR-0.0021OP*TURN-0.0244OP*DISP0.0052OP*EQISS0.0055
[-0.6][-1.26][1.74][1.36]
Q-20.0058Q-20.0013Q-20.0052Q-2-0.0011
[1.58][0.42][0.46][-0.31]
Firm-year3522Firm-year5568Firm-year4071Firm-year4394
R square0.3199R square0.4312R square0.3802R square0.3579
Panel B
(1)(2)(3)(4)
OP-0.0121OP-0.0022OP-0.0203OP0.0014
[-2.27][-0.35][-0.76][0.26]
RSH-0.0042RSH-0.0087RSH0.1490RSH0.0083
[-1.01][-1.34][1.25][0.46]
DACCR0.0390TURN0.1408DISP-0.0101EQISS0.0249
[3.82][2.11][-1.56][1.28]
Q-10.0290Q-10.0236Q-10.0156Q-10.0335
[6.04][5.38][3.31][6.44]
CF0.0527CF0.0406CF0.0610CF0.0481
[7.08][8.54][8.3][8.45]
CASH0.0118CASH0.0122CASH0.0054CASH0.0028
[3.51][6.97][2.3][1.35]
SHROWN-0.0004SHROWN-0.0020SHROWN-0.0031SHROWN0.0001
[-0.16][-0.91][-1.09][0.05]
OP*DACCR-0.0030OP*TURN-0.0424OP*DISP-0.0035OP*EQISS0.0061
[-0.55][-1.54][-0.92][0.49]
RSH*DACCR-0.0484RSH*TURN0.0922RSH*DISP0.0261RSH*EQISS0.0714
[-2.6][0.88][1.52][2.48]
Q-20.0061Q-20.0108Q-20.0138Q-20.0008
[1.3][2.53][2.93][0.15]
Firm-year1921Firm-year2953Firm-year2200Firm-year2384
R square0.3154R square0.2705R square0.2784R square0.3146
Table 4.31: Managerial incentives and firm investment
Panel A
(1)(2)(3)(4)
OP-0.0107OP0.0014OP0.0250OP-0.0032
[-1.74][0.23][1.17][-0.61]
DACCR0.0111TURN0.2451DISP-0.0082EQISS0.0247
[1][3.69][-0.99][1.39]
Q-10.0466Q-10.0411Q-10.0345Q-10.0325
[10.05][10.89][8.15][7.67]
CF0.0204CF0.0213CF0.0432CF0.0253
[3.32][5.41][7.49][5.4]
CASH0.0145CASH0.0140CASH0.0220CASH0.0129
[5.64][9.26][10.42][6.93]
SHROWN0.0002SHROWN0.0008SHROWN0.0015SHROWN-0.0005
[0.11][0.48][0.77][-0.26]
OP*DACCR-0.0009OP*TURN-0.0166OP*DISP0.0027OP*EQISS0.0086
[-0.21][-0.77][0.82][1.77]
Q-20.0086Q-20.0002Q-20.0010Q-20.0037
[2.02][0.05][0.25][0.94]
Q-3-0.0030Q-30.0002Q-3-0.0068Q-3-0.0093
[-0.75][-1.54][-1.91][-2.6]
Firm-year2712Firm-year4341Firm-year3100Firm-year3378
R square0.2041R square0.3617R square0.3286R square0.2784
Panel B
(1)(2)(3)(4)
OP-0.0069OP0.0073OP-0.0425OP0.0023
[-1.18][1.08][-1.43][0.41]
RSH-0.0035RSH-0.0082RSH0.0657RSH0.0128
[-0.76][-1.07][0.5][0.68]
DACCR0.0203TURN0.1105DISP-0.0072EQISS0.0133
[1.69][1.58][-1][0.66]
Q-10.0262Q-10.0211Q-10.0090Q-10.0374
[5.14][4.52][1.74][6.72]
CF0.0140CF0.0396CF0.0486CF0.0475
[6.36][7.83][5.96][7.59]
CASH-0.0001CASH0.0108CASH0.0039CASH0.0025
[2.11][6.12][1.61][1.12]
SHROWN-0.0017SHROWN-0.0020SHROWN-0.0045SHROWN-0.0011
[-0.02][-0.72][-1.11][-0.31]
OP*DACCR0.0131OP*TURN-0.0597OP*DISP-0.0071OP*EQISS0.0413
[1.81][-2.07][-1.68][3]
RSH*DACCR-0.0535RSH*TURN0.0804RSH*DISP0.0170RSH*EQISS0.0163
[-2.82][0.67][0.9][0.25]
Q-20.0046Q-20.0123Q-20.0150Q-20.0005
[0.87][2.59][2.86][0.08]
Q-30.0040Q-30.0031Q-30.0080Q-30.0022
[0.84][0.73][1.67][0.43]
Firm-year1576Firm-year2508Firm-year1813Firm-year1971
R square0.2527R square0.2709R square0.2326R square0.2870
Table 4.28: Executive Compensation and Corporate Investment
Panel A
(1)(2)(3)(4)
OP0.0007OP0.0079OP0.0080OP0.0039
[0.34][3.05][ 0.86][2.03]
DACCR0.0382TURN0.4340DISP-0.0018EQISS0.0348
[4.79][7.08][-0.21][2.88]
DACCR-10.0376TURN-10.0063DISP-10.0235EQISS-10.0230
[4.67][0.10][ 2.81][1.96 ]
Q0.0475Q0.0497Q0.0450Q0.0398
[15.15][18.74][13.89][13.81]
CF0.0333CF0.0429CF0.0503CF0.0395
[8.38][16.48][13.28][12.75]
CASH0.0164CASH0.0165CASH0.0160CASH0.0150
[11.71][19.54][12.14][14.74]
SHROWN-0.0000SHROWN0.0011SHROWN-0.0001SHROWN-0.0002
[-0.05][1.37][ -0.09][-0.21]
OP*DACCR-0.0007OP*TURN-0.0208OP*DISP0.0004OP*EQISS0.0051
[-0.47][-1.95][0.18][2.59]
OP*DACCR-1-0.0038OP*TURN-1-0.0148OP*DISP-10.0002OP*EQISS-1-0.0060
[-2.63][-1.39][0.12][-3.16]
Firm-year5411Firm-year8859Firm-year5285Firm-year7061
R square0.2836R square0.4435R square0.3870R square0.3981
Panel B
(1)(2)(3)(4)
OP0.0004OP-0.0011OP0.0195OP0.0024
[0.15][-0.36][1.43][0.92]
RSH-0.0046RSH-0.0013RSH0.0586RSH-0.0003
[-1.50][-0.28][1.00][-0.07]
DACCR0.0181TURN0.1050DISP-0.0088EQISS0.0760
[2.15][1.53][-1.16][4.23]
DACCR-10.0134TURN-1-0.0607DISP-1-0.0053EQISS-10.0198
[1.59][-0.81][-0.73][1.23]
Q0.0302Q0.0294Q0.0235Q0.0303
[8.33][8.54][ 5.86][8.08]
CF0.0635CF0.0568CF0.0708CF0.0689
[11.42][14.43][11.81][15.52]
CASH0.0298CASH0.0144CASH0.0130CASH0.0032
[11.22][10.99][ 6.39][1.98]
SHROWN-0.0004SHROWN0.0016SHROWN0.0013SHROWN0.0007
[-0.36][1.47][0.74][0.58]
OP*DACCR-0.0001OP*TURN0.0054OP*DISP-0.0054OP*EQISS-0.0043
[-0.05][0.37][-2.22][-1.00]
OP*DACCR-1-0.0047OP*TURN-10.0335OP*DISP-10.0073OP*EQISS-1-0.0009
[-1.68][1.72][3.17][-0.22]
RSH*DACCR-0.0155RSH*TURN-0.0971RSH*DISP0.0276RSH*EQISS-0.0148
[-1.48][-1.59][2.24][-3.43]
RSH*DACCR-10.0205RSH*TURN-10.0811RSH*DISP-1-0.0190RSH*EQISS-10.0030
[1.75][1.30][-2.70][0.54]
Firm-year3237Firm-year4885Firm-year3193Firm-year4018
R square0.3413R square0.3615R square0.3316R square0.3757
Table 4.29: Executive Compensation and Corporate Investment
Panel A
(1)(2)(3)(4)
OP-0.0060OP0.0157OP0.0532OP0.0096
[-1.29][3.01][2.74][2.48]
DACCR0.0233TURN0.3574DISP-0.0104EQISS0.0433
[2.52][5.6][-1.2][3.20]
DACCR-10.0372TURN-10.0077DISP-10.0153EQISS-10.0271
[4.04][0.12][1.84][2.18]
Q0.0445Q0.0473Q0.0433Q0.0363
[12.96][16.36][12.2][11.53]
CF0.0359CF0.0392CF0.0588CF0.0368
[7.68][12.87][12.38][11.53]
CASH0.0174CASH0.0155CASH0.0166CASH0.0128
[10.73][15.68][10.46][10.21]
SHROWN-0.0000SHROWN0.0018SHROWN0.0010SHROWN-0.0010
[0.01][1.44][0.60][-0.74]
OP*DACCR0.0015OP*TURN-0.0222OP*DISP0.0024OP*EQISS0.0024
[0.48][-1.03][0.62][0.64]
OP*DACCR-1-0.0074OP*TURN-1-0.0363OP*DISP-10.0044OP*EQISS-1-0.0105
[-2.40][-1.68][1.21][-2.90]
Firm-year4501Firm-year6975Firm-year4071Firm-year5608
R square0.2884R square0.4128R square0.3829R square0.3753
Panel B
(1)(2)(3)(4)
OP-0.0044OP-0.0035OP-0.0182OP-0.0027
[-0.87][-0.57][-0.63][-0.52]
RSH-0.0047RSH0.0007RSH0.2252RSH-0.0034
[-1.21][0.11][1.76][-0.52]
DACCR0.0318TURN0.2605DISP-0.0063EQISS0.0427
[3.27][3.34][-0.82][2.06]
DACCR-10.0111TURN-10.0718DISP-1-0.0116EQISS-10.0179
[1.19][0.88][-1.57][0.97]
Q0.0333Q0.0286Q0.0223Q0.0347
[7.84][7.49][5.27][7.75]
CF0.0718CF0.0516CF0.0627CF0.0531
[11.02][11.55][8.52][10.03]
CASH0.0182CASH0.0100CASH0.0059CASH0.0035
[5.78][6.78][2.54][1.97]
SHROWN-0.0005SHROWN-0.0006SHROWN-0.0032SHROWN0.0008
[-0.28][-0.31][-1.1][0.33]
OP*DACCR-0.0004OP*TURN-0.1204OP*DISP-0.0045OP*EQISS0.0115
[-0.07][-3.46][-0.98][0.91]
OP*DACCR-1-0.0018OP*TURN-10.1466OP*DISP-10.0013OP*EQISS-1-0.0188
[-0.35][3.88][0.3][-1.95]
RSH*DACCR-0.0485RSH*TURN0.0068RSH*DISP0.0056RSH*EQISS-0.0497
[-2.64][0.06][0.22][-3.84]
RSH*DACCR-10.0156RSH*TURN-1-0.1224RSH*DISP-10.0319RSH*EQISS-10.0343
[0.88][-1.17][1.30][3.25]
Firm-year2289Firm-year3447Firm-year2200Firm-year2846
R square0.3657R square0.3601R square0.2828R square0.3261
sum1
Table 4.1 Sample summary statistics (1980-2005)
NMedianSDMeanMin25%th75%thMAX
Panel A
INVEST384860.190.340.283.070.110.323.07
DACCR38486-0.011.23-0.045.73-0.160.125.73
Q384861.311.531.8011.981.011.9311.98
CF384860.272.590.129.750.090.589.75
CASH384860.226.201.8656.670.051.0256.67
KZ384860.291.530.245.11-0.441.085.11
Panel B
INVEST963410.200.460.363.070.110.413.07
TURN963410.050.100.080.580.020.100.58
Q963411.311.721.8911.981.002.0111.98
CF963410.253.46-0.149.750.020.609.75
CASH963410.317.822.7456.670.061.5656.67
KZ963410.311.590.335.110.071.565.11
Panel C
INVEST385840.250.400.372.510.140.442.51
DISP38584-5.491.42-5.49-1.82-6.45-4.58-1.82
Q385841.461.481.979.671.102.219.67
CF385840.352.360.409.630.130.779.63
CASH385840.357.342.8450.550.061.8850.55
KZ385840.151.340.143.67-0.570.983.67
Panel D
INVEST722950.200.400.333.070.110.373.07
EQISS722950.011.760.4412.48-0.010.1312.48
Q722951.281.581.7911.981.001.9111.98
CF722950.253.030.059.750.060.609.75
CASH722950.287.172.3556.670.061.2856.67
KZ722950.361.560.345.11-0.401.225.11
Table 4.9 Sample summary statistics (1982-1999)
NMedianSDMeanMin25%th75%thMAX
Panel A
INVEST187360.200.260.280.020.120.331.64
INST187360.350.240.370.000.160.560.87
DACCR18736-0.000.80-0.02-3.66-0.140.123.61
Q187361.301.271.710.621.031.878.71
CF187360.311.080.40-4.950.130.605.28
CASH187360.203.031.130.000.050.8022.81
Panel B
INVEST454380.230.430.360.010.130.422.78
INST454380.260.240.310.000.100.490.87
TURN454380.050.090.080.000.020.090.49
Q454381.301.521.820.601.021.9510.15
CF454380.292.160.27-11.930.100.648.45
CASH454380.275.722.040.000.061.2341.63
Panel C
INVEST250550.260.410.390.030.150.462.59
INST250550.410.220.420.030.240.590.90
DISP25055-5.241.32-5.22-8.34-6.10-4.39-1.73
Q250551.421.381.900.721.092.138.90
CF250550.351.710.53-7.730.158.378.37
CASH250550.415.172.000.000.240.5935.49
Panel C
INVEST354290.220.340.340.010.120.382.21
INST354290.270.240.240.000.100.490.87
EQISS354290.001.171.17-0.91-0.010.098.39
Q354291.271.341.340.729.051.850.60
CF354290.291.741.74-9.070.110.617.99
CASH354290.234.764.760.000.061.0235.14
Table 4.2 Mispricing and Corporate Investment:
Correlation between variables
Panel A
INVESTDACCRQCFCASHKZ
INVEST1
DACCR0.081
Q0.240.071
CF-0.050.13-0.201
CASH0.360.040.22-0.181
KZ-0.14-0.05-0.25-0.11-0.251
Panel B
INVESTTURNQCFCASHKZ
INVEST1
TURN0.231
Q0.230.261
CF-0.09-0.05-0.251
CASH0.370.190.22-0.191
KZ-0.12-0.10-0.22-0.07-0.241
Panel C
INVESTDISPQCFCASHKZ
INVEST1
DISP0.141
Q0.300.181
CF0.08-0.27-0.031
CASH0.390.090.27-0.041
KZ-0.16-0.14-0.35-0.12-0.251
Panel D
INVESTEQISSQCFCASHKZ
INVEST1
EQISS0.341
Q0.210.361
CF-0.05-0.50-0.201
CASH0.340.450.20-0.121
KZ-0.11-0.12-0.23-0.11-0.221
INVEST~TINSTEQISSQCFCASH
Table 4.9 Correlation between variablesINVESTMENT1.00
Panel AINST0.021
INVESTINSTDACCRQCFCASHEQISS0.35-0.08831
INVEST1Q0.260.06340.36951
INST0.021CF0.120.1513-0.3298-0.08871
DACCR0.110.011CASH0.34-0.03750.44770.24240.12631
Q0.270.090.071
CF0.210.130.180.021
CASH0.35-0.080.040.250.231
Panel B
INVESTINSTTURNQCFCASH
INVEST1
INST0.011
TURN0.300.281
Q0.270.050.311
CF0.040.160.00-0.161
CASH0.38-0.030.200.270.001
Panel C
INVESTINSTDISPQCFCASH
INVEST1.00
INST-0.011.00
DISP0.12-0.271.00
Q0.320.100.201.00
CF0.190.14-0.230.041.00
CASH0.43-0.020.120.300.151.00
Panel D
INVESTINSTEQISSQCFCASH
INVEST1
INST0.021
EQISS0.35-0.091
Q0.260.060.371
CF0.120.15-0.33-0.091
CASH0.34-0.040.450.240.131
Table 4.19 Correlation between variablesTable 4.21 Correlation between variables
Panel APanel A
INVESTOPQCFCASHSHROWNDACCRINVESTOPQCFCASHSHROWNTURN
INVEST1.00INVEST1.00
OP0.181.00OP0.191.00
Q0.330.061.00Q0.380.091.00
CF0.280.030.241.00CF0.310.050.211.00
CASH0.360.220.270.311.00CASH0.430.210.280.371.00
SHROWN0.010.14-0.010.00-0.011.00SHROWN0.050.140.030.060.031.00
DACCR0.06-0.040.090.13-0.05-0.011.00TURN0.390.260.300.120.32-0.061.00
Panel BPanel B
INVESTOPRSHQCFCASHSHROWNDACCRINVESTOPRSHQCFCASHSHROWNTURN
INVEST1.00INVEST1.00
OP0.181.00OP0.201.00
RSH0.020.151.00RSH0.030.171.00
Q0.23-0.03-0.011.00Q0.230.03-0.011.00
CF0.400.080.050.251.00CF0.390.070.030.161.00
CASH0.330.220.060.130.441.00CASH0.310.120.100.030.391.00
SHROWN0.070.160.07-0.020.03-0.001.00SHROWN0.130.190.070.010.060.051.00
DACCR0.060.030.010.060.150.00-0.011.00TURN0.220.260.020.110.100.18-0.041.00INVEST~TOPRSHQCFCASHSHROWNTURNOVER
Panel CPanel C
INVESTOPQCFCASHSHROWNDACCRINVESTOPQCFCASHSHROWNTURNINVESTMENT1
INVEST1.00INVEST1.00OP0.17841
OP0.161.00OP0.171.00RSH0.02920.13211
Q0.330.051.00Q0.370.061.00Q0.22370.03670.0251
CF0.310.030.231.00CF0.330.030.211.00CF0.39520.0680.02980.15341
CASH0.370.240.280.281.00CASH0.430.200.250.381.00CASH0.29010.09660.04940.00840.38531
SHROWN0.020.090.000.010.001.00SHROWN0.070.090.040.060.041.00SHROWN0.02710.08050.0853-0.01110.0018-0.00781
DACCR0.03-0.040.070.13-0.08-0.021.00TURN0.400.220.300.110.32-0.051.00TURNOVER0.23160.26960.02360.09830.09070.2103-0.05021
Panel DPanel D
INVESTOPRSHQCFCASHSHROWNDACCRINVESTOPRSHQCFCASHSHROWNTURN
INVEST1.00INVEST1.00
OP0.171.00OP0.181.00
RSH0.020.111.00RSH0.030.131.00
Q0.22-0.020.021.00Q0.220.040.031.00
CF0.410.100.050.211.00CF0.400.070.030.151.00
CASH0.360.220.050.110.431.00CASH0.290.100.050.010.391.00
SHROWN0.030.080.09-0.010.01-0.011.00SHROWN0.030.080.09-0.010.00-0.011.00
DACCR0.070.02-0.000.070.130.000.001.00TURN0.230.270.020.100.090.21-0.051.00
Table 4.23 Correlation between variablesTable 4.25 Correlation between variables
Panel APanel A
INVESTOPQCFCASHSHROWNDISPINVESTOPQCFCASHSHROWNEQISS
INVEST1.00INVEST1.00
OP0.191.00OP0.191.00
Q0.370.081.00Q0.340.071.00
CF0.340.090.221.00CF0.320.070.221.00
CASH0.430.210.280.461.00CASH0.380.210.240.421.00
SHROWN0.060.120.030.060.001.00SHROWN0.040.140.020.040.021.00
DISP0.150.100.18-0.120.090.051.00EQISS0.330.130.18-0.040.33-0.021.00
Panel BPanel B
INVESTOPRSHQCFCASHSHROWNDISPINVESTOPRSHQCFCASHSHROWNEQISS
INVEST1.00INVEST1.00
OP0.221.00OP0.201.00
RSH0.080.271.00RSH0.030.191.00
Q0.230.04-0.021.00Q0.230.01-0.021.00
CF0.390.070.060.151.00CF0.410.080.030.161.00
CASH0.310.120.190.030.411.00CASH0.300.130.120.030.441.00
SHROWN0.130.180.060.020.070.071.00SHROWN0.140.210.090.000.050.051.00
DISP0.060.090.000.10-0.22-0.080.041.00EQISS0.110.080.06-0.02-0.26-0.020.031.00
Panel CPanel C
INVESTOPQCFCASHSHROWNDISPINVESTOPQCFCASHSHROWNEQISS
INVEST1.00INVEST1.00
OP0.171.00OP0.171.00
Q0.370.061.00Q0.330.051.00
CF0.350.090.231.00CF0.340.060.211.00
CASH0.440.210.250.471.00CASH0.390.200.220.441.00
SHROWN0.080.060.050.070.031.00SHROWN0.060.080.020.050.031.00
DISP0.140.100.17-0.130.090.071.00EQISS0.270.110.14-0.120.26-0.021.00
Panel DPanel D
INVESTOPRSHQCFCASHSHROWNDISPINVESTOPRSHQCFCASHSHROWNEQISS
INVEST1.00INVEST1.00
OP0.201.00OP0.171.00
RSH0.100.271.00RSH0.030.141.00
Q0.230.050.001.00Q0.220.010.011.00
CF0.400.070.100.151.00CF0.410.060.040.171.00
CASH0.290.090.140.020.411.00CASH0.280.100.070.010.421.00
SHROWN0.040.070.040.010.02-0.011.00SHROWN0.050.110.13-0.000.000.001.00
DISP0.020.05-0.020.09-0.24-0.100.011.00EQISS0.070.040.05-0.06-0.23-0.040.021.00
Table 4.20 Sample Summary Statistics (1992-2005)
Panel A
NMedianSDMeanMin25%th75%thMax
INVEST66450.220.270.290.030.130.361.88
OP66451.992.612.770.050.853.8513.10
Q66451.621.492.110.761.202.409.36
CF66450.351.190.53-4.420.160.758.35
CASH66450.274.211.610.000.061.2238.04
SHROWN66450.615.872.980.000.172.5033.12
DACCR6645-0.010.62-0.06-2.69-0.140.092.30
Panel B
INVEST36750.180.170.230.030.120.271.88
OP36751.231.831.800.050.542.4013.10
RSH36750.100.790.240.000.040.2522.96
Q36751.491.121.840.761.172.109.36
CF36750.330.750.46-4.420.170.598.35
CASH36750.142.240.700.000.040.4938.04
SHROWN36750.313.781.440.000.120.8933.12
DACCR36750.000.45-0.01-2.69-0.080.082.30
Panel C
INVEST56440.210.250.280.030.130.341.68
OP56441.001.461.450.030.431.977.82
Q56441.611.452.080.751.202.368.98
CF56440.351.140.51-4.290.160.737.71
CASH56440.253.891.510.000.061.1536.21
SHROWN56440.315.042.300.000.081.6228.68
DACCR5644-0.010.58-0.06-2.61-0.130.092.18
Panel D
INVEST26810.180.160.220.030.120.271.68
OP26810.591.030.930.030.251.217.82
RSH26810.060.730.160.000.020.1420.20
Q26811.471.061.800.751.172.058.98
CF26810.320.750.46-4.290.170.587.71
CASH26810.132.340.660.000.040.4536.21
SHROWN26810.002.990.880.000.050.0828.68
DACCR26810.000.44-0.00-2.61-0.070.082.18
Table 4.22 Sample Summary Statistics (1992-2005)
Panel A
NMedianSDMeanMin25%th75%thMax
INVEST105580.240.350.360.030.140.441.88
OP105582.282.753.030.050.984.2013.10
Q105581.661.622.220.761.212.569.36
CF105580.391.630.70-4.420.160.918.35
CASH105580.385.692.450.000.071.9638.04
SHROWN105580.716.193.280.000.183.0533.12
TURN105580.110.150.160.020.060.210.74
Panel B
INVEST54400.190.200.240.030.120.291.88
OP54401.301.911.880.050.572.5013.10
RSH54400.110.740.250.000.040.2622.96
Q54401.451.101.800.761.142.059.36
CF54400.351.120.59-4.420.170.668.35
CASH54400.174.941.470.000.050.6938.04
SHROWN54400.323.931.500.000.120.9333.12
TURN54400.090.100.120.020.060.140.74
Panel C
INVEST85660.230.310.330.030.140.401.68
OP85661.101.541.580.030.512.147.82
Q85661.621.542.150.751.202.418.98
CF85660.381.520.65-4.290.160.867.71
CASH85660.345.272.240.000.061.7436.21
SHROWN85660.395.242.530.000.092.0428.68
TURN85660.110.150.160.020.060.210.74
Panel D
INVEST39550.190.190.240.030.120.291.68
OP39550.621.080.980.030.281.277.82
RSH39550.060.630.160.000.020.1620.20
Q39551.441.041.760.751.151.998.98
CF39550.341.020.56-4.290.170.647.71
CASH39550.164.931.410.000.040.6036.21
SHROWN39550.152.880.850.000.050.4328.68
TURN39550.090.090.110.020.060.140.74
Table 4.24 Sample Summary Statistics (1992-2005)
Panel A
NMedianSDMeanMin25%th75%thMax
INVEST80500.250.350.370.030.150.451.88
OP80502.352.643.040.061.044.2412.33
Q80501.711.702.310.801.252.679.92
CF80500.431.700.81-3.880.180.979.29
CASH80500.455.782.590.000.072.1837.34
SHROWN80500.746.013.290.000.193.1430.47
DISP8050-6.081.32-6.07-9.46-6.94-5.21-2.71
Panel B
INVEST42160.190.200.240.030.120.291.88
OP42161.351.891.920.060.602.5412.33
RSH42160.110.500.240.000.040.2613.00
Q42161.471.181.850.801.152.119.92
CF42160.371.200.63-3.880.170.709.29
CASH42160.194.891.520.000.050.7737.34
SHROWN42160.343.581.430.000.120.9430.47
DISP4216-6.541.20-6.54-9.46-7.29-5.76-2.71
Panel C
INVEST66140.240.310.340.030.140.421.71
OP66141.131.461.570.030.532.157.34
Q66141.671.642.230.801.242.559.67
CF66140.421.570.76-3.600.180.928.45
CASH66140.405.312.360.000.072.0135.15
SHROWN66140.415.172.580.000.092.1026.89
DISP6614-6.221.30-6.22-9.48-7.07-5.37-2.89
Panel D
INVEST30770.190.190.240.030.120.291.71
OP30770.651.081.000.030.291.307.34
RSH30770.060.330.140.000.030.158.30
Q30771.451.141.810.801.152.079.67
CF30770.351.070.60-3.600.170.678.45
CASH30770.174.851.460.000.040.6835.15
SHROWN30770.152.610.790.000.050.4126.89
DISP3077-6.581.17-6.60-9.48-7.36-5.84-2.89
Table 4.26 Sample Summary Statistics (1992-2005)
Panel A
NMedianSDMeanMin25%th75%thMax
INVEST85830.230.300.330.030.140.411.88
OP85832.132.722.910.050.914.0613.10
Q85831.621.532.150.761.202.479.36
CF85830.381.510.69-4.420.170.878.35
CASH85830.325.172.160.000.061.6538.04
SHROWN85830.666.263.270.000.172.9333.12
EQISS85830.010.740.14-1.85-0.040.103.98
Panel B
INVEST45680.190.200.240.030.120.291.88
OP45681.251.861.830.050.562.4413.10
RSH45680.110.740.250.000.040.2613.00
Q45681.431.061.770.761.142.019.36
CF45680.341.120.60-4.420.160.658.35
CASH45680.164.571.310.000.040.6438.04
SHROWN45680.313.531.370.000.120.8933.12
EQISS4568-0.000.43-0.03-9.46-0.070.023.98
Panel C
INVEST70240.220.280.310.030.140.381.68
OP70241.041.521.520.030.462.057.82
Q70241.601.462.090.751.192.368.98
CF70240.371.430.66-4.290.170.847.71
CASH70240.294.851.990.000.061.4936.21
SHROWN70240.365.272.510.000.081.9528.68
EQISS70240.000.640.08-1.86-0.050.083.37
Panel D
INVEST33430.190.180.230.030.120.281.68
OP33430.601.050.950.030.271.257.82
RSH33430.060.600.160.000.020.1620.20
Q33431.421.011.730.751.141.958.98
CF33430.331.020.56-4.290.160.627.71
CASH33430.144.511.260.000.040.5636.21
SHROWN33430.142.490.770.000.050.4028.68
EQISS3343-0.000.39-0.03-1.86-0.070.023.37
sum
nummanOPRSH
Table 4.1Table 4.8PercentilesSmallestPercentilesSmallestPercentilesSmallest
Sumamary Statistics for Misprxing Proxies, Investment, and Control VariablesSumary Statistics for Insitutional Ownership1%111%0.05405921.31E-071%0.00157910.00009
Full SampleSubsample MeansNMeanSDMinMax5%215%0.17977290.0000795%0.00676420.0000902
NMeanSDMinMax1980s1990s2001-5Full Sample1256010.230.231.16E-080.9910%21Obs2028910%0.30996030.0000944Obs2027610%0.01341770.0001206Obs7328
Panel A. Misprcing Proxies198241730.170.181.83E-060.9725%4125%0.74468140.0002233Sum of Wgt.2027625%0.03879770.0002257Sum of Wgt.7328
DACCR41042-0.0070.2-13.3518.87-0.0071-0.0068-0.0075198347160.180.181.83E-060.92
TURNOVER1159400.145.892.23E-061403.700.0760.170.14198448100.190.191.66E-060.9450%5Mean4.26211250%1.737179Mean2.57359550%0.1015484Mean0.2458936
EQISS730241.3917.573.72E-0718170.431.322.25198553620.200.192.25E-050.95LargestStd. Dev.1.226154LargestStd. Dev.2.80938LargestStd. Dev.0.6706032
DISP146134-5.481.47-12.012.19-4.64-5.47-6.04198656020.220.209.01E-060.9675%5975%3.4828837.4075675%0.252555918.7473
DISP244382-5.011.43-11.822.84-4.30-5.07-5.38198761520.210.201.35E-060.9690%5990%5.8196737.60894Variance7.89261690%0.53672119.94402Variance0.4497086
DISP315465-5.071.6-11.142.82-4.25-4.96-5.26198859820.210.201.03E-060.9695%61095%7.60492543.67842Skewness3.4383895%0.865677720.2172Skewness18.46421
Panel B. Investment198960150.210.215.72E-060.9699%61199%12.8590256.65112Kurtosis28.8681799%1.98988622.96036Kurtosis505.4133
CAPX1029870.476.781.80E-051412.250.440.50.45199061450.210.213.66E-060.97
CAPXRD538912.0120.261.30E-042731.50.971.893.14199159850.240.221.09E-051.00
Panel C. Control Variables199265040.240.237.25E-060.99
Q1123072.063.290.081393.121.772.172.23199373400.250.241.78E-060.99
CF102364-0.3946.14-4690.259624.50.12-0.15-1.37199482690.240.243.31E-070.99
EARN1459880.090.56-11.7666.790.230.0880.0098199590290.240.243.27E-071.00
EARN2446510.150.77-6.7576.120.310.150.046199697230.250.253.06E-061.00
EARN3221530.170.93-4.9272.770.430.230.083199796880.270.263.77E-061.00
DACCR is the discretionary accruals. Turnover is the share turnover ratio. EQISS is the past share1998100640.250.261.16E-081.00
issuance. DISP1, DISP2, and DISP3 are dispersion fpr one-year EPS forecast, two-year EPS forecast1999100420.240.261.26E-081.00
and three-year EPS forecast, respectively. CAPX is the capital expenditure to PPE ratio. CAPX is the sum
of capital expenditure and R&D to PPE ratio. Q is the market value of equity plus total asset minus the
minus the book value of equity minus deferred taxes, divided by firms total assets. CF is the sum of
income before extraordinary items and depreciation and amortization scaled by PPE. EARN1, EARN2,
and EARN3 are one-year, two-year, and three-year earnings forecasts, respectively.
Table 4.16 Managerial Compensation Forms
Panel A
SampleOptionsRestricted SharesBothNone
Observation20289129480732813
Percentage100%63.82%0.00%36.12%0.06%
Panel B
SampleOptionsRestricted SharesBothNone
Observation1528610519053070
Percentage100%68.81%0.00%31.19%0.00%
Panel A presents the compensation forms for top executives. The 'options' column
shows the firms whose top executives hold options, but do not hold restricted
shares during the fisical year. The 'restricted shares' column shows the firms whose
top executives hold restricted share only. The 'both' column shows the firms whose
top executives hold both restricted share and options. The 'none' column shows the
firms whose top executives hold nither options nor restricted shares. Panel B presents
the compensation forms for CEOs.
Table 4.19 Summary Statistics for Options, Restricted shares and Managerial Ownership
Panel A
10%50%95%
NMeanSDSmallestLargestpecentilepecentilepecentile
Options202892.572.811.31E-0756.650.311.747.60
Restricted shares73280.250.679.00E-0522.961.21E-040.100.87
Ownership201312.726.232.48E-0689.010.050.5313.62
Panel B
10%50%95%
NMeanSDSmallestLargestpecentilepecentilepecentile
Options158261.361.624.71E-0528.380.160.864.14
Restricted shares53070.150.577.63E-0520.200.010.060.51
Ownership155212.055.285.57E-0776.110.020.2711.20
All the numbers are in terms of the percentage. Panel A is for the top executives. Panel B is
for the CEOs.
op
Table 4.19 Managerial compensation and firm investment (option)Table 4.20 Managerial compensation and firm investment (option)
Panel APanel A
(1)(2)(3)(4)(5)(6)(1)(2)(3)(4)(5)(6)
MOPi,t-0.0302-0.0629**-0.0675MOPi,t-0.0322-0.0146-0.0523MOPi,t-0.2090**-0.2448**-0.2593**MOPi,t-0.2232**-0.1612-0.2287
(0.0269)(0.0310)(0.0355)(0.0262)(0.0296)(0.0341)(0.0883)(0.1011)(0.1204)(0.1036)(0.1170)(0.1362)
DACCRi,t0.4507***0.4366***0.3368***EQISSi,t0.6901***0.5942***0.4336***DACCRi,t0.9153***0.8557***0.5998***EQISSi,t0.9315***0.5384**0.4910
(0.0388)(0.0431)(0.0483)(0.0650)(0.0797)(0.0961)(0.1225)(0.1375)(0.1632)(0.2111)(0.2514)(0.3003)
Qi,t-10.0504***0.0452***0.0429***Qi,t-10.0509***0.0464***0.0434***Qi,t-10.1150***0.1037***0.0951***Qi,t-10.0974***0.1026***0.0886***
(0.0031)(0.0037)(0.0042)(0.0029)(0.0034)(0.0039)(0.0085)(0.0101)(0.0121)(0.0097)(0.0111)(0.0132)
CFi,t-10.0445***0.0543***0.0611***CFi,t-10.0447***0.0354***0.0366***CFi,t-10.0531***0.1119***0.1299***CFi,t-10.0703***0.01840.0455***
(0.0039)(0.0050)(0.0060)(0.0028)(0.0033)(0.0038)(0.0106)(0.0143)(0.0181)(0.0091)(0.0107)(0.0129)
MSHROWNi,t0.0117***0.0149***0.0117**MSHROWNi,t0.0142***0.0133***0.0088MSHROWNi,t0.01130.01550.0219MSHROWNi,t0.01010.00320.0036
(0.0036)(0.0043)(0.0048)(0.0035)(0.0042)(0.0050)(0.0141)(0.0166)(0.0197)(0.0157)(0.0185)(0.0218)
Qi,t-2-0.000020.0045Qi,t-2-0.00160.0035Qi,t-20.00960.0216*Qi,t-20.00070.0305***
(0.0035)(0.0041)(0.0030)(0.0035)(0.0095)(0.0117)(0.0098)(0.0117)
Qi,t-3-0.0078**Qi,t-3-0.0136***Qi,t-3-0.0091Qi,t-3-0.0470***
(0.0039)(0.0033)(0.0111)(0.0109)
Observations515339733010Observations722757034402Observations315724261819Observations441134772678
R-square0.19080.17610.1695R-square0.26040.22680.1989R-square0.095540.07740.0618R-square0.11650.12060.0502
Panel BPanel B
MOPi,t-0.0187-0.0160-0.0282MOPi,t0.02450.03120.0202MOPi,t-0.1524-0.1684-0.2200MOPi,t0.0405-0.01270.0068
(0.0249)(0.0276)(0.0311)(0.0322)(0.0372)(0.0427)(0.0100)(0.1127)(0.1253)(0.1283)(0.1496)(0.1656)
TURNOVERi,t0.2983***0.2532***0.2223***DISPi,t0.0296***0.0311***0.0352***TURNOVERi,t0.6561***0.6348***0.7507***DISPi,t0.0504***0.0443**0.0342
(0.0387)(0.0429)(0.0485)(0.0048)(0.0055)(0.0064)(0.1371)(0.1541)(0.1739)(0.0190)(0.0218)(0.0240)
Qi,t-10.0603***0.0547***0.0486***Qi,t-10.0614***0.0604***0.0504***Qi,t-10.1132***0.1003***0.0846***Qi,t-10.1101***0.1085***0.0801***
(0.0028)(0.0031)(0.0035)(0.0032)(0.0035)(0.0040)(0.0095)(0.0106)(0.0118)(0.0105)(0.0116)(0.0128)
CFi,t-10.0397***0.0312***0.0330***CFi,t-10.0470***0.0387***0.0403***CFi,t-10.0627***0.0431***0.0373***CFi,t-10.0889***0.0689***0.0719***
(0.0026)(0.0030)(0.0035)(0.0033)(0.0039)(0.0046)(0.0086)(0.0100)(0.0120)(0.0111)(0.0129)(0.0154)
MSHROWNi,t0.0195***0.0174***0.0133***MSHROWNi,t0.0094**0.00530.0028MSHROWNi,t0.02470.01520.0118MSHROWNi,t0.01260.00160.0096
(0.0032)(0.0039)(0.0045)(0.0040)(0.0048)(0.0055)(0.0152)(0.0181)(0.0205)(0.0196)(0.0227)(0.0251)
Qi,t-20.00250.0077**Qi,t-20.00070.0090**Qi,t-20.00400.0207*Qi,t-20.00030.0257**
(0.0029)(0.0034)(0.0033)(0.0038)(0.0098)(0.0111)(0.0107)(0.0118)
Qi,t-3-0.0144***Qi,t-3-0.0184***Qi,t-3-0.0465***Qi,t-3-0.0409***
(0.0032)(0.0036)(0.0104)(0.0113)
Observations835766575197Observations619848193691Observations503940043123Observations385529862278
R-square0.26680.24640.2262R-square0.24910.24480.2296R-square0.13950.12460.0733R-square0.12680.11330.0532
The sample is for the top five excutives. The dependent vatiable is CAPX. The standard deviation of theThe sample is for the top five excutives. The dependent vatiable is CAPXRD. The standard deviation of
coefficient is reported in the parenthesis.The R-square is overall R-square. *** indicates 1% significantthe coefficient is reported in the parenthesis.The R-square is overall R-square. *** indicates 1%
level.**indicates 5% significant level. MOP is the mean options granted of the five top executives.significant level.**indicates 5% significant level. MOP is the mean options granted of the five executives.
MSHROWN is the mean of ownership of the executives excluding the options and restricted shares.MSHROWN is the mean of ownership of the executives excluding the options and restricted shares.
Table 4.21 Managerial compensation and firm investment ( option)Table 4.22 Managerial compensation and firm investment ( option)
Panel APanel A
(1)(2)(3)(4)(5)(6)(1)(2)(3)(4)(5)(6)
OPi,t-0.0466**-0.0198-0.0223OPi,t-0.01080.00970.0041OPi,t-0.2091***-0.1147-0.1161OPi,t-0.1867**-0.1422-0.1335
(0.0223)(0.0260)(0.0304)(0.0225)(0.0263)(0.0304)(0.0719)(0.0845)(0.1062)(0.0861)(0.0988)(0.1124)
DACCRi,t0.3226***0.3233***0.2734***EQISSi,t0.8719***0.7525***0.3886**DACCRi,t0.6703***0.6118***0.5316***EQISSi,t1.044***1.0762***0.1069
(0.0470)(0.0529)(0.0571)(0.0996)(0.1254)(0.1594)(0.1426)(0.1633)(0.1957)(0.3081)(0.3671)(0.4867)
Qi,t-10.0435***0.0377***0.0362***Qi,t-10.0476***0.0371***0.0330***Qi,t-10.0862***0.0757***0.0736***Qi,t-10.0965***0.0918***0.0634***
(0.0036)(0.0044)(0.0051)(0.0035)(0.0043)(0.0048)(0.0097)(0.0118)(0.0145)(0.0108)(0.0131)(0.0144)
CFi,t-10.0403***0.0410***0.0478***CFi,t-10.0265***0.0201***0.0305***CFi,t-10.1026***0.1531***0.1247***CFi,t-10.0558***0.