The Empirical Study Of The Effect Of Top-Managers’ Pay Performance Sensitivity On Non-efficiency Investment

In modern companies, the separation of the management and the ownership has caused the principal-agent problem. This means when it comes to corporate decision-making, the operators tend to pursuit their own interests rather than shareholders’, which would damage the value of the company, one of its performance is non-efficiency investment, including over-investment and under-investment. Many studies have shown that there is a larger proportion of under-investment in these two types of non-efficiency investment. Both of the two non-efficiency investment will directly affect the business performance, thus it is not conducive to achieve the financial management goals of maximizing the value of company corporate, the owner’s fortune. So, this study attempts to find a new way to solve non-efficiency investment under the principal-agent theory.In this paper, the author introduces executive compensation incentive to the field of investment efficiency management on the basis of previous studies, to explore the effect of executive compensation incentive on non-efficiency investment so as to make the evaluation of the effectiveness of incentive contracts in China’s listed companies and provide the basis for solving the problem of inefficient investment. At the same time, provide the basis for solving the problem of inefficient investment.This article establishes a capital-investment model, it can construct the sample data into the overinvestment sample and underinvestment sample.Then create overinvestment model and underinvestment model, applying the data of the A-share listed companies between 2009 to 2011 as the samples, to analyze the correlation between the executive compensation incentive and non-investment activities in deeply.The outcome of the empirical study shows that there is a negative correlation between the pay performance sensitivity and the over-investment as well as a positive correlation between PPS and the under-investment. The research indicates that the failure of the pay incentive causes the non-efficiency investment and agency cost, thus the shareholders should design a incentive contract which can maximize their value then provide a new path to govern the non-efficiency investment.