Managerial incentives and a firm's cash flow sensitivities

Xu, Pisun (Tracy)

International Review of Economics & Finance, 2013, vol. 27, issue C, 80-96

Abstract: This paper adds a new perspective to the compensation literature by examining the impact of managerial incentives on firm behavior in an information asymmetry framework. The analyses show that managerial equity-based compensation exacerbates firms' information asymmetry problems by focusing managers on the interests of existing shareholders. Firms with equity-based compensation rely more on internal funds. When there is a one-standard deviation increase in managerial equity-based compensation, firms will invest $0.05 more, save $0.02 more as cash and make a $0.07 lower net payout in response to a $1 increase in cash flow. Furthermore, the significant impact of managerial incentives on firms' cash flow sensitivities is predominant in small firms and firms with high market-to-book values.

Keywords: Managerial incentives; Cash flow sensitivities; Executive compensation; Information asymmetry (search for similar items in EconPapers)
JEL-codes: G30 G34 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:27:y:2013:i:c:p:80-96

DOI: 10.1016/j.iref.2012.09.004

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