Does Executive Compensation Restrict Firm Over-investment?

Abstract

The current study examines the impact of executives’ compensation on frm over-investment. It uses the panel data of 215 USA non-fnancial listed frms during the period 2007-2019, and it employs an explanatory research with secondary fnancial data. The study outcomes show that total executives’ compensation is negatively associated with over-investment. It also found an insignifcant relationship between over-investment and stock awards but a signifcant relationship with stock options, in addition to CEO compensation signifcantly reducing frms’ over investments. The inverse relationship between executive compensations and over-investment is consistent with the agency cost hypothesis. Accordingly, the hypothesis that states that there is a positive relationship between executive compensation and over-investment is accepted.