An Empiricalstudy On The Effect Of The Executive Compensation Systemand The Investment Efficiency

The real economy’s investment activities have always played an important rolein enterprise value maximization. However, China’s investment activities of fixedassets appears a decline trend, meanwhile, the investment efficiency generally is nothigh. As senior management personnel is enterprise owners’ agent, whether if theymake a reasonable investment decision, the realization of enterprise owner’s benefitmaximization is always an issue which is worth studying. This study aims to prove ifthe executive compensation system can be applied to the investment decision-makingprogress so as to optimize the enterprise investment behavior research, and designmore effective and reasonable compensation system.At first, this article defines inefficiency investment and executive compensationsystem. After the reviews of predecessor’s research, this research uses thecombination methods of theoretical analysis and empirical analysis and focus on twomain questions. One is to test if inefficiency investment exists in China’smanufacturing industry listed companies and to what extent the inefficiency exists.The other is to verify whether the executive compensation system can be able toimpact the inefficiency investment behavior.Second, through the capital investment measurement model, we found that mostof China’s manufacturing listed companies have inefficiency investment behavior, andpredominance representation is under-investment. This empirical study finds out therehas a positive relation between the executive compensation system andover-investment, that is to say, executive compensation system will aggravate theenterprise’s over-investment degree. At the meantime, a negative correlation existsbetween executive compensation system and under-investment. All the empiricalresults have fully supported the theoretical hypothesis.At last, the empirical results suggest that to some extent China’s listedcompany’s executive compensation can effect senior executives’ investment decisionprocess, therefore, through the design of an executive compensation system with fullyconstraints and incentive effect so that to make the homogeneity of senior executivesand shareholders’ interests. By doing so, senior executives can make their decisionfrom the shareholders’standpoint, and alleviate the inefficiency investment caused bythe principal-agent problem in maximum extent.