Executive Equity Incentives, Overconfidence and Corporate Inefficient Investment

Sisi Xiong

doi:10.4236/ojbm.2019.71015

Abstract

In the past research on equity incentives, the influence of incentive system on individual psychological factors was often neglected. From the perspective of behavioral company finance, this paper takes executives from 2010 to 2016 China A-share listed companies as research samples to research framework for overconfidence, executive equity incentives, and corporate inefficient in-vestment. The results of the study show that equity incentives can alleviate the underinvestment behavior of executives by influencing executives’ over-confidence, and executive overconfidence is partly a sub-mediating effect. However, for over-invested enterprises, the indirect effect of executive over-confidence generated by equity incentives on corporate over-investment is a deterioration, and the direct effect of equity incentives is opposite to the indirect effect. So executives’ overconfidence in equity incentives, in the ex-cessive investment of enterprises, plays a special mediating effect—the cover effect.

Highlights

In recent years, investment-driven economic development models have been widely criticized, and as the scale of investment in fixed assets continues to rise, investment efficiency has continued to decline
By closely linking the manager’s salary income with the company’s performance, it can alleviate the excessive investment caused by the agency problem, and can alleviate the insufficient investment of the enterprise caused by different risk preferences and financing constraints
The regression results of Model1 show that the estimated coefficient of total equity incentives (EI_ALLi,t) is significantly positive at 1%, indicating that the implementation of executive equity incentives can alleviate the underinvestment behavior of enterprises

Summary

Introduction

Investment-driven economic development models have been widely criticized, and as the scale of investment in fixed assets continues to rise, investment efficiency has continued to decline. The investment scale of China’s A-share listed companies has been increasing, but the investment efficiency has declined year by year. By closely linking the manager’s salary income with the company’s performance, it can alleviate the excessive investment caused by the agency problem, and can alleviate the insufficient investment of the enterprise caused by different risk preferences and financing constraints. In the past studies on executive equity incentives and corporate inefficient investment, most of them are based on the traditional relationship between the two under the principal-agent theory framework. This paper will relax the rational human premise in the traditional principal-agent theory, and try to explore the relationship between executive equity incentives and corporate inefficient investment from the perspective of behavioral company finance What role does the executive overconfidence caused by equity incentive play in the relationship between equity incentive and inefficient investment? Does executive overconfidence play different roles in executive equity incentives, overinvestment and underinvestment? This paper will relax the rational human premise in the traditional principal-agent theory, and try to explore the relationship between executive equity incentives and corporate inefficient investment from the perspective of behavioral company finance

Literature Reviews

Research Design

Variable Measurement

Results

Conclusions