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- Publisher Website: 10.1016/S0304-405X(01)00065-4
- Scopus: eid_2-s2.0-0000713363
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Article: Capital budgeting and compensation with asymmetric information and moral hazard
Title | Capital budgeting and compensation with asymmetric information and moral hazard |
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Authors | |
Keywords | Capital budgeting Moral hazard Mechanism design Investment policy G31 D82 Compensation Asymmetric information |
Issue Date | 2001 |
Citation | Journal of Financial Economics, 2001, v. 61, n. 3, p. 311-344 How to Cite? |
Abstract | We consider optimal capital allocation and managerial compensation mechanisms for decentralized firms when division managers have an incentive to misrepresent project quality and to minimize privately costly but value-enhancing effort. We show that in the optimal mechanism firms always underinvest in capital relative to a naive application of the net present value (NPV) rule. We make a number of novel cross-sectional predictions about the severity of the underinvestment problem and the composition of managerial compensation contracts. We also find that firms will optimally give greater performance-based pay (at the expense of fixed wages) to managers of higher quality projects to mitigate the incentive for managers to overstate project quality. Managers may thus receive greater performance-based pay because they manage higher quality projects, not that greater performance-based pay causes firm value to increase. © 2001 Elsevier Science S.A. |
Persistent Identifier | http://hdl.handle.net/10722/241881 |
ISSN | 2023 Impact Factor: 10.4 2023 SCImago Journal Rankings: 13.655 |
ISI Accession Number ID |
DC Field | Value | Language |
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dc.contributor.author | Bernardo, Antonio E. | - |
dc.contributor.author | Cai, Hongbin | - |
dc.contributor.author | Luo, Jiang | - |
dc.date.accessioned | 2017-06-23T01:55:59Z | - |
dc.date.available | 2017-06-23T01:55:59Z | - |
dc.date.issued | 2001 | - |
dc.identifier.citation | Journal of Financial Economics, 2001, v. 61, n. 3, p. 311-344 | - |
dc.identifier.issn | 0304-405X | - |
dc.identifier.uri | http://hdl.handle.net/10722/241881 | - |
dc.description.abstract | We consider optimal capital allocation and managerial compensation mechanisms for decentralized firms when division managers have an incentive to misrepresent project quality and to minimize privately costly but value-enhancing effort. We show that in the optimal mechanism firms always underinvest in capital relative to a naive application of the net present value (NPV) rule. We make a number of novel cross-sectional predictions about the severity of the underinvestment problem and the composition of managerial compensation contracts. We also find that firms will optimally give greater performance-based pay (at the expense of fixed wages) to managers of higher quality projects to mitigate the incentive for managers to overstate project quality. Managers may thus receive greater performance-based pay because they manage higher quality projects, not that greater performance-based pay causes firm value to increase. © 2001 Elsevier Science S.A. | - |
dc.language | eng | - |
dc.relation.ispartof | Journal of Financial Economics | - |
dc.subject | Capital budgeting | - |
dc.subject | Moral hazard | - |
dc.subject | Mechanism design | - |
dc.subject | Investment policy | - |
dc.subject | G31 | - |
dc.subject | D82 | - |
dc.subject | Compensation | - |
dc.subject | Asymmetric information | - |
dc.title | Capital budgeting and compensation with asymmetric information and moral hazard | - |
dc.type | Article | - |
dc.description.nature | link_to_subscribed_fulltext | - |
dc.identifier.doi | 10.1016/S0304-405X(01)00065-4 | - |
dc.identifier.scopus | eid_2-s2.0-0000713363 | - |
dc.identifier.volume | 61 | - |
dc.identifier.issue | 3 | - |
dc.identifier.spage | 311 | - |
dc.identifier.epage | 344 | - |
dc.identifier.isi | WOS:000170259300002 | - |
dc.identifier.issnl | 0304-405X | - |