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Managerial Compensation, Investment and Financial Leverage: An Empirical Analysis of UK Firms.

Adu-Ameyaw, E (2020) Managerial Compensation, Investment and Financial Leverage: An Empirical Analysis of UK Firms. Doctoral thesis, Liverpool John Moores University.

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Abstract

This thesis examines the causal effects of the different components of managerial compensation on the value-critical risk-taking activities, particularly those linked to investment, and financial leverage. Employing a three-stage least squares (3SLS) technique in a system of equations, the study makes interesting contributions to the growing strand of literature using datasets from the UK (FTSE 350) companies for the period 2006 – 2015. Specifically, this scholarly study contributes to the extant literature in three ways. First, the study finds that higher long-term incentive plans (LTIPs) and stock options incentive cause more investment in capital expenditure and fixed intangible but less in research and development activity, whilst greater cash bonus induces more intangibles (research and development and fixed intangible) investment but less capital expenditure activity. Largely, the presented evidence is contrary to the view that the risk-motivated incentives (stock options and LTIPs) encourage more riskier activity like R&D. Rather, shareholders use risk-avoiding incentive (cash bonus) to reduce managerial risk-related agency problems. Further, the result suggests that higher LTIPs and stock options lead to lower spending on other fixed asset activities, which is inconsistent with the risk-related argument. Second, the study further contributes to the optimal contracting theory by suggesting that the level and the effectiveness of managerial compensation induces capital expenditure investment distortions. Specifically, the research finds that extremely over-compensated (under- compensated) managers are more (less) likely to commit over-investment in capital expenditure. In contrast, extremely over-compensated (under-compensated) managers have a decreased (increased) probability of over-investing in research and development. Finally, the finding shows that LTIPs (stock options) has a positive (negative) impact on leverage, which is consistent (inconsistent) with the alignment (risk-motivated incentive) hypothesis, whilst the cash bonus finding shows support for the risk-reduction assumption. The study also observes that shareholders use more debt-like incentive (deferred stock) to reduce the risk-shifting incentive problem and lower agency cost of debt. The evidence further reveals that the effectiveness of the stock options (risk-motivated) incentive to induce managerial risk- taking decisions via borrowings is limited to high-growth opportunity firms. Additionally, consistent with the alignment hypothesis, the study finds that highly monitored (governed) firms use the LTIPs incentive to influence managers to contract more debt; however, the stock options incentive discourages more borrowing in such governing state. This tends to support the view that the firm’s remuneration committee applies LTIPs in lieu of stock options to minimise managerial excessive risk-taking.

Item Type: Thesis (Doctoral)
Uncontrolled Keywords: Executive compensation, corporate governance, investment, financial leverage, risk-taking activities
Subjects: H Social Sciences > HF Commerce > HF5001 Business
H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
Divisions: Doctoral Management Studies (new Sep 19)
Date Deposited: 10 Jul 2020 18:39
Last Modified: 13 Jul 2020 09:43
DOI or Identification number: 10.24377/LJMU.t.00013224
Supervisors: Aneirin, SO, Zhang, F and Franco, M
URI: https://researchonline.ljmu.ac.uk/id/eprint/13224

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