Investment efficiency and compensation committee expertise

Abstract

Building upon agency, resource dependence, and group decision making theories, this thesis aims to investigate investment efficiency in the light of compensation committee attributes. With US data from 2003 to 2010, the results of this thesis show that business expertise, which is particularly proxied by CEO experience, and legal expertise are important attributes for compensation committee members if they are to design efficient compensation contracts that encourage CEOs to undertake efficient investment projects. While both CEO and legal expertise are found to enhance investment efficiency, the latter, i.e., legal expertise has a more pronounced effect in mitigating under- and over-investment. Contrary to expectation, accounting/finance expertise appears to exacerbate over-investment. In the presence of business – CEO and legal attributes, however, the effect of accounting/finance expertise is significant to enhance investment efficiency, particularly when the accounting/finance attribute is mixed or joint with the other two types of expertise, although not all regression models used in the study are consistent in predicting this significant effect. Relative to the results reported in the single expertise regressions, mixed and joint expertise amongst compensation committee members are documented to have stronger effects on investment efficiency. A further analysis that disaggregates the total investment into three components: capital expenditure, acquisition and R&D investment is then undertaken to provide an explanation for the inconsistency in the main regression results. The additional analysis indicates that of the three components of total investment, the effect of the single, mixed and joint expertise of the compensation committee is more pronounced on R&D investments due to the distinct features of this type of investment. Finally, this thesis does not only complement the existing literature of investment efficiency and executive compensation through the examination of more aligned compensation contracts arranged by compensation committee members with significant attributes, but it also recommends to the market authorities the importance of regulating these attributes as a mandatory requirement for the members of compensation committees in performing their governance function effectively, which has been overlooked in the past.