Do CEO and CFO Equity Incentives Influence Investment Inefficiency?

Abstract

[Purpose]This study investigates how CEO and CFO equity incentives influence investment inefficiency. [Methodology]We examine the sample of 8,896 firm－year observations listed on New York Stock Exchange (NYSE) in the United States from 1992 to 2014. We obtain the compensation data and firm financial characteristics from ExecuComp and Compustat, respectively. [Findings]We find that investment inefficiency is positively related to CEO and CFO equity incentives. Also, CFO equity incentive is more likely to be linked to investment inefficiency than CEO equity incentive. Furthermore, the effect of CFO equity incentive on investment inefficiency becomes greater when the CEO has greater power. [Policy Implications]First, this study attempts to establish a link between CEO and CFO equity incentives and investment inefficiency. Second, the importance of CFO as an ultimate position in charge of capital investment decisions become evident based on our findings. Lastly, our results suggest that CEO power is also a significant determinant of investment inefficiency by influencing the CFO decision makings.