Zhan Lei, Cai Mingchao, Yaoyao Wang, and Jing Yu

ABSTRACT: According to agency theory, we hypothesize that underpayment of top management motivates management to overinvest. Using a sample of Chinese-listed companies for the period 2005–10, we assess the effect of managerial compensation on overinvestment and the effect of overinvestment on managerial private benefits, including future compensation and perquisites, as well as on firm performance. We find that underpayment does motivate overinvestment, which increases managerial private benefits but not firm value.

KEY WORDS: managerial compensation, overinvestment, private benefits.

To link to this article: https://doi.org/10.2753/REE1540-496X500308