CEO ownership and discretionary investments

Aloke Ghosh, Doocheol Moon, Kishore Tandon

Research output: Contribution to journalArticle

20 Citations (Scopus)

Abstract

This study investigates empirically the relationship between CEO ownership and discretionary investments such as R&D and capital expenditures. We assert that the under-investment problem is high for R&D-intensive projects, while the over-investment problem is high for capital expenditures because of differences in risk between the two types of investments. Building on the linkages between investments and investment-related agency problems, we hypothesize that the relationship between CEO ownership and investments depends on whether increasing ownership mitigates or exacerbates the under- or over-investment problem. We find a non-linear association between CEO stock ownership and R&D investments; R&D investments increase and then decline across increasing levels of ownership. Further, we find that R&D investments and CEO stock options are positively associated at high levels of option holdings. In contrast, capital expenditures do not vary with CEO ownership (stock or options). Finally, consistent with our underlying assumption, we find that the influence of R&D investments on future firm risk is significantly larger than that of capital expenditures. Our findings indicate that managerial risk aversion affects discretionary investments.

Original languageEnglish
Pages (from-to)819-839
Number of pages21
JournalJournal of Business Finance and Accounting
Volume34
Issue number5-6
DOIs
Publication statusPublished - 2007 Jun 1

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CEO ownership
Capital expenditures
Ownership
Underinvestment
Overinvestment
Chief executive officer
Linkage
Firm risk
Agency problems
Risk aversion
Stock options

All Science Journal Classification (ASJC) codes

  • Accounting
  • Business, Management and Accounting (miscellaneous)
  • Finance

Cite this

Ghosh, Aloke ; Moon, Doocheol ; Tandon, Kishore. / CEO ownership and discretionary investments. In: Journal of Business Finance and Accounting. 2007 ; Vol. 34, No. 5-6. pp. 819-839.
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CEO ownership and discretionary investments. / Ghosh, Aloke; Moon, Doocheol; Tandon, Kishore.

In: Journal of Business Finance and Accounting, Vol. 34, No. 5-6, 01.06.2007, p. 819-839.

Research output: Contribution to journalArticle

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