Research On The Impact Of The Executive Compensation Incentive On Non-efficient Investments

Both for the development of an enterprise, or for a country’s economic growth, capital investment is crucial. Modigliani and Miller outline a perfect world where the company’s capital investment decisions are completely determined by the net present value of the project, and the amount of investment spending only depends on the investment opportunities the enterprises had, but other factors nothing to do with it. However, in the real world, due to the separation of the management and ownership of the company, the principal-agent problem is widespread. In this way, the company’s managers are likely to obtain their own benefits rather than the benefits of shareholders when making investment decisions.Because of the existence of the agency problems of managers, the company’s capital investment may produce the phenomenon of under-investment or over-investment. Executive payment as an important mechanism can alleviate the agency problem of managers and also can consistent the management’s self-interest and the interests of the shareholders of the company.This paper aims to study the relationship of the Chinese manufacturing listed companies between executive compensation incentive and non-efficiency investment, and analyze that whether the executive pay incentives of Chinese manufacturing listed companies can effectively restrain the executive agency problems caused by under-investment or over-investment phenomenon.This paper is divided into six chapters, the main content of each chapter is as follows:Chapter1ExordiumThis chapter introduces the background and the significance of the research; Secondly, this paper introducds the ideas and the framework of the research. In the part of the ideas of the research, executive pay incentive is divided into executive incentive pay and executives stake, and executives monetary incentive variables are divided into the variable incentive pay based on the market performance and pay based on accounting report results. In addition, the non-efficiency investments are divided into underinvestment and overinvestment in two cases from insufficient investment and over-investment. At the same time the ideas and framework seem clearer because of the use of the technology roadmap.Chapter2Literature ReviewThis chapter begins at "executive compensation incentives affect non-efficient investments" research literature reviewed. For the study of the relationship between executive pay incentives and non-efficiency investments, foreign scholars have conducted little research, and their conclusions are not entirely consistent. Some studies have shown a positive correlation between executive pay incentives and non-efficiency investment exist. There are some studies showed that there was no correlation between executive pay incentives and non-efficient investments. But most scholars in their literature found the existence of a negative correlation between executive pay incentives and non-efficient investments. Similarly, on the relationship of executive pay and the non-efficient investment incentives, the domestic scholars also didn’t get the same conclusions. In addition, the vast majority of domestic literature is concerned only on behalf of the long-term incentive executives holdings of non-efficiency investments, and no incentive pay for executives currencies study of the effects of non-efficiency investments. Literature is only concerned about the the executives currency incentive pay over-investment, while ignoring the impact of under-investment. In order to make a better theory foreshadowing, we make the literature reviewed about the incentive system arrangements with agency problems and the agency problems with non-efficiency investments.Chapter3Theoretical analysisThis chapter defines the definition of non-efficient investment and the definition of executive pay incentives and reviewed the theoretical basis. Secondly, we study the institutional background of the listed companies from the listed company executive compensation incentive to the institutional background of the listed company investment. Finally, based on theoretical analysis and institutional background, we study the relations of the executive pay incentives with excessive investment and the relations of the executive pay incentives with insufficient investment. In the theoretical analysis part, based on theoretical analysis and institutional background, we get some paper expectations on executive pay incentives relations with non-efficiency investments, however, there is some difference between the empirical results and this paper’s expectation.Chapter4Assumptions, variables, the model and dataThis chapter respectively makes the assumptions about the relationship between the executive monetary pay incentive or executive stock ownership incentive and underinvestment or overinvestment. The explanation variable executive pay incentive variables are divided into executive monetary incentive variables and executive stock ownership incentive variable, and the explanatory variables non-efficient investment variables are divided into insufficient investment variables and excessive investment variables. The control variables include the free cash flow variable, financial risk variable, working consumption variable and year dummies variables. Firstly, we build executives optimal monetary pay level model and the optimal level of investment model to metric executive monetary incentive pay variable and insufficient investment and over-investment variables, and then build the model including executive compensation incentives variables and investment or over-investment variables.In addition, we make the interpretation of the data used in this chapter.Chapter5Empirical resultsDue to the relationship of return on ordinary shareholders variable with the monetary payment of executives is not significant, so we study the relationship between the rest of the three executive incentive compensation variables and the underinvestment or overinvestment. The relationship of the underinvestment with the executive currency pay incentive which based on the rate of return on total assets is not significant; the relationship of the executive currency pay incentive which based on ROE with the underinvestment is also not significant. So the assumption that the relationship of the executive currency pay incentives with insufficient investment is negative is unproven. The assumption that the relationship of the executive stock incentive with insufficient investment is negative is also not proven. The relationship of the over-investment with the executive currency incentive based on the rate of return on total assets is negative which confirmed assumption3; The relationship of the over-investment with the executive currency incentive based on ROE is negative which also confirmed assumption3. So the relationship of the executive currency incentive with excessive investment is negative correlation has been confirmed. Executive stock incentive can not significantly affect insufficient investment or overinvestment, so assumption4failed to be confirmed.Chapter6Conclusion, policy recommendations and improved ideasAccording to the theoretical analysis and empirical results, this paper get the research conclusions:(1) The executive currency pay of Chinese listed manufacturing companies mainly depends on the performance of the company’s accounting performance, while almost don’t depend on the market performance.(2) Private cost of the executives is not the main reason of the lack of investment for listed manufacturing companies in China.(3) The private income of the executives is an important reason of over-investment for Chinese manufacturing listed companies.(4) Executives monetary incentive takes a significant restraining effect on excessive investment for listed companies of Chinese manufacturing industry.(5) Executive stock incentive did not take constraints on non-efficiency investment for Chinese manufacturing listed company. Secondly, according to the empirical results and conclusions presented in this chapter, some suggestions are shown.The main contribution of this paper is:(1) This paper expends the research perspective of inefficient investment research and agency problems. On the study of executive payment and agency problems, many researchers have focused on the perspective of executive payment and company performance, and only a little study have focused on the perspective of the non-efficiency investment and the agency problems. On the study of domestic non-investment issues, many researchers focus on the characteristics of the background of the controller and its equity, and only a little study focus on the executive compensation incentives. Moreover, many scholars only focus on the over-investment, ignoring the under-investment.(2) The research method was also improved. In this paper, we take the proportion of stock the executive owned as a way of executive pay incentives. Respectively, we take three executives currency incentive variable based on the performance of the market variable which is return on ordinary shareholders and the accounting performance variables which are return on net assets and total assets on net profit margin. The research method is different from other literature.(3) In the empirical study part, we use listed manufacturing companies as samples. Manufacturing companies make more fixed assets investment, and investment in fixed assets have a more direct impact on the output of the manufacturing companies. So there is more meaningful studying on the manufacturing companies.Some directions this article needs further research:(1) Improvement of the explanatory variables. Executive compensation incentives in this paper only contain monetary incentive and executive stock incentive. However, the stock options incentive is a part of the executive compensation incentive. With the stock option incentive universal, what kind of impact it could take on non-efficient investments needs further attention in future research.(2) The improvement of the model.In this paper, the measure of the optimal level of investment of the listed companies in Chinese manufacturing industry come from the model of Richardson. But investment decisions are influenced by many factors, and there are many factors that can not be quantified. Future studies could choose the most suitable model for Chinese listed manufacturing companies.(3) Verification the main reason of under-investment. The results of this study found that there is no relationship between executive pay incentives and under-investment, and it is different from our expectation. The main reason of the under-investment in listed companies of Chinese manufacturing industry is worth further study.