CEO compensation, governance structure, and foreign direct investment in conflict-prone countries

Abstract

Despite the apparent risks associated with an investment in conflict-prone countries, these countries still attract substantial investment from multinational enterprises (MNEs). Combining prospect theory and agency theory on principal–principal conflict, this study examines how CEO compensation affects investment decisions in conflict-prone countries. Using a panel dataset of 1036 privately owned Chinese MNEs from 2010 to 2019, we find that undercompensated CEOs are more likely to invest in conflict-prone countries as a means of compensating for the lack of remuneration. This effect, however, is contingent on the governance structures of their firms. We argue that the presence of more independent directors on boards makes undercompensated CEOs more likely to invest in conflict-prone regions. In contrast, the presence of more supervisors on boards makes undercompensated CEOs less likely to invest in such regions.