Variation in Executive Compensation and Allocation of Cash Flow

Chihchung Chien; Shikuan Chen; Mingjen Chang

doi:doi:10.11648/j.eco.20200903.11

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Variation in Executive Compensation and Allocation of Cash Flow

Chihchung Chien, Shikuan Chen, Mingjen Chang

Published in Economics (Volume 9, Issue 3)

Received: 31 May 2020 Accepted: 17 June 2020 Published: 4 July 2020

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Abstract

This study investigates whether the variation in executive compensation play an important role in allocation of internal generated cash flow. Several financial literature focus on the issue of cash-flow sensitivity on various uses of internally generated cash flow. Firms are able to distribute their incremental cash flow to payout dividends, reimburse debt, raise equity, hold cash as precautionary savings or increase the investment to obtain the growth opportunity in the future. However, a few studies investigate the change in cash-flow sensitivity on various uses after incorporating the variation in executive compensations and other control variables. According to academic theory of incentive-pay and agency problems, CEOs have incentive to allocate more cash flow to risky investment projects in order to increase their contingent rewards if there is more free cash flow in a firm. Accordingly, we propose that cash-flow sensitivity on investment and cash holding are more volatile than other uses in firms when we take account of variation in different types of executive compensation. This proposition highlight an interesting phenomenon that overinvestment directly connects to overpayment of CEOs. Moreover, we clarify that restriction on executive compensation, perhaps reduces the agency cost but it also forces firms to reduce managerial talent or effort such that cash-flow sensitivity of various uses would rely on the type of executive compensation. Using the cash-flow sensitivity model, we find that the variation in executive compensation would change the allocation of cash flow and lead to agency problems. After controlling the firm’s characteristics, CEO’s characteristics and governance characteristics, we highlight that time varying excess executive compensation significantly explain the cash-flow sensitivity on various uses. In particular, the performance-sensitive pay (incentive-pay) induced by self-serving motivation and unobserved CEO talent is responsible for variation in cash-flow sensitivity on internal cash flow allocation.

Published in	Economics (Volume 9, Issue 3)
DOI	10.11648/j.eco.20200903.11
Page(s)	49-59
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2024. Published by Science Publishing Group

Keywords

Cash-flow Sensitivity, Excess Executive Compensation, Performance-sensitive Pay, Self-serving Motivation, Unobserved CEO Talent

References

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APA Style

Chihchung Chien, Shikuan Chen, Mingjen Chang. (2020). Variation in Executive Compensation and Allocation of Cash Flow. Economics, 9(3), 49-59. https://doi.org/10.11648/j.eco.20200903.11

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Chihchung Chien; Shikuan Chen; Mingjen Chang. Variation in Executive Compensation and Allocation of Cash Flow. Economics. 2020, 9(3), 49-59. doi: 10.11648/j.eco.20200903.11

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AMA Style

Chihchung Chien, Shikuan Chen, Mingjen Chang. Variation in Executive Compensation and Allocation of Cash Flow. Economics. 2020;9(3):49-59. doi: 10.11648/j.eco.20200903.11

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@article{10.11648/j.eco.20200903.11,
  author = {Chihchung Chien and Shikuan Chen and Mingjen Chang},
  title = {Variation in Executive Compensation and Allocation of Cash Flow},
  journal = {Economics},
  volume = {9},
  number = {3},
  pages = {49-59},
  doi = {10.11648/j.eco.20200903.11},
  url = {https://doi.org/10.11648/j.eco.20200903.11},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.eco.20200903.11},
  abstract = {This study investigates whether the variation in executive compensation play an important role in allocation of internal generated cash flow. Several financial literature focus on the issue of cash-flow sensitivity on various uses of internally generated cash flow. Firms are able to distribute their incremental cash flow to payout dividends, reimburse debt, raise equity, hold cash as precautionary savings or increase the investment to obtain the growth opportunity in the future. However, a few studies investigate the change in cash-flow sensitivity on various uses after incorporating the variation in executive compensations and other control variables. According to academic theory of incentive-pay and agency problems, CEOs have incentive to allocate more cash flow to risky investment projects in order to increase their contingent rewards if there is more free cash flow in a firm. Accordingly, we propose that cash-flow sensitivity on investment and cash holding are more volatile than other uses in firms when we take account of variation in different types of executive compensation. This proposition highlight an interesting phenomenon that overinvestment directly connects to overpayment of CEOs. Moreover, we clarify that restriction on executive compensation, perhaps reduces the agency cost but it also forces firms to reduce managerial talent or effort such that cash-flow sensitivity of various uses would rely on the type of executive compensation. Using the cash-flow sensitivity model, we find that the variation in executive compensation would change the allocation of cash flow and lead to agency problems. After controlling the firm’s characteristics, CEO’s characteristics and governance characteristics, we highlight that time varying excess executive compensation significantly explain the cash-flow sensitivity on various uses. In particular, the performance-sensitive pay (incentive-pay) induced by self-serving motivation and unobserved CEO talent is responsible for variation in cash-flow sensitivity on internal cash flow allocation.},
 year = {2020}
}

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TY  - JOUR
T1  - Variation in Executive Compensation and Allocation of Cash Flow
AU  - Chihchung Chien
AU  - Shikuan Chen
AU  - Mingjen Chang
Y1  - 2020/07/04
PY  - 2020
N1  - https://doi.org/10.11648/j.eco.20200903.11
DO  - 10.11648/j.eco.20200903.11
T2  - Economics
JF  - Economics
JO  - Economics
SP  - 49
EP  - 59
PB  - Science Publishing Group
SN  - 2376-6603
UR  - https://doi.org/10.11648/j.eco.20200903.11
AB  - This study investigates whether the variation in executive compensation play an important role in allocation of internal generated cash flow. Several financial literature focus on the issue of cash-flow sensitivity on various uses of internally generated cash flow. Firms are able to distribute their incremental cash flow to payout dividends, reimburse debt, raise equity, hold cash as precautionary savings or increase the investment to obtain the growth opportunity in the future. However, a few studies investigate the change in cash-flow sensitivity on various uses after incorporating the variation in executive compensations and other control variables. According to academic theory of incentive-pay and agency problems, CEOs have incentive to allocate more cash flow to risky investment projects in order to increase their contingent rewards if there is more free cash flow in a firm. Accordingly, we propose that cash-flow sensitivity on investment and cash holding are more volatile than other uses in firms when we take account of variation in different types of executive compensation. This proposition highlight an interesting phenomenon that overinvestment directly connects to overpayment of CEOs. Moreover, we clarify that restriction on executive compensation, perhaps reduces the agency cost but it also forces firms to reduce managerial talent or effort such that cash-flow sensitivity of various uses would rely on the type of executive compensation. Using the cash-flow sensitivity model, we find that the variation in executive compensation would change the allocation of cash flow and lead to agency problems. After controlling the firm’s characteristics, CEO’s characteristics and governance characteristics, we highlight that time varying excess executive compensation significantly explain the cash-flow sensitivity on various uses. In particular, the performance-sensitive pay (incentive-pay) induced by self-serving motivation and unobserved CEO talent is responsible for variation in cash-flow sensitivity on internal cash flow allocation.
VL  - 9
IS  - 3
ER  -

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Author Information

Chihchung Chien

Department of Finance, Asia University, Taichung, Taiwan
Shikuan Chen

Department of International Business, National Taiwan University, Taipei, Taiwan
Mingjen Chang

Department of Economics, National Dong Hwa University, Hualien, Taiwan

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APA Style

Chihchung Chien, Shikuan Chen, Mingjen Chang. (2020). Variation in Executive Compensation and Allocation of Cash Flow. Economics, 9(3), 49-59. https://doi.org/10.11648/j.eco.20200903.11

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ACS Style

Chihchung Chien; Shikuan Chen; Mingjen Chang. Variation in Executive Compensation and Allocation of Cash Flow. Economics. 2020, 9(3), 49-59. doi: 10.11648/j.eco.20200903.11

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AMA Style

Chihchung Chien, Shikuan Chen, Mingjen Chang. Variation in Executive Compensation and Allocation of Cash Flow. Economics. 2020;9(3):49-59. doi: 10.11648/j.eco.20200903.11

Copy | Download

@article{10.11648/j.eco.20200903.11,
  author = {Chihchung Chien and Shikuan Chen and Mingjen Chang},
  title = {Variation in Executive Compensation and Allocation of Cash Flow},
  journal = {Economics},
  volume = {9},
  number = {3},
  pages = {49-59},
  doi = {10.11648/j.eco.20200903.11},
  url = {https://doi.org/10.11648/j.eco.20200903.11},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.eco.20200903.11},
  abstract = {This study investigates whether the variation in executive compensation play an important role in allocation of internal generated cash flow. Several financial literature focus on the issue of cash-flow sensitivity on various uses of internally generated cash flow. Firms are able to distribute their incremental cash flow to payout dividends, reimburse debt, raise equity, hold cash as precautionary savings or increase the investment to obtain the growth opportunity in the future. However, a few studies investigate the change in cash-flow sensitivity on various uses after incorporating the variation in executive compensations and other control variables. According to academic theory of incentive-pay and agency problems, CEOs have incentive to allocate more cash flow to risky investment projects in order to increase their contingent rewards if there is more free cash flow in a firm. Accordingly, we propose that cash-flow sensitivity on investment and cash holding are more volatile than other uses in firms when we take account of variation in different types of executive compensation. This proposition highlight an interesting phenomenon that overinvestment directly connects to overpayment of CEOs. Moreover, we clarify that restriction on executive compensation, perhaps reduces the agency cost but it also forces firms to reduce managerial talent or effort such that cash-flow sensitivity of various uses would rely on the type of executive compensation. Using the cash-flow sensitivity model, we find that the variation in executive compensation would change the allocation of cash flow and lead to agency problems. After controlling the firm’s characteristics, CEO’s characteristics and governance characteristics, we highlight that time varying excess executive compensation significantly explain the cash-flow sensitivity on various uses. In particular, the performance-sensitive pay (incentive-pay) induced by self-serving motivation and unobserved CEO talent is responsible for variation in cash-flow sensitivity on internal cash flow allocation.},
 year = {2020}
}

Copy | Download

TY  - JOUR
T1  - Variation in Executive Compensation and Allocation of Cash Flow
AU  - Chihchung Chien
AU  - Shikuan Chen
AU  - Mingjen Chang
Y1  - 2020/07/04
PY  - 2020
N1  - https://doi.org/10.11648/j.eco.20200903.11
DO  - 10.11648/j.eco.20200903.11
T2  - Economics
JF  - Economics
JO  - Economics
SP  - 49
EP  - 59
PB  - Science Publishing Group
SN  - 2376-6603
UR  - https://doi.org/10.11648/j.eco.20200903.11
AB  - This study investigates whether the variation in executive compensation play an important role in allocation of internal generated cash flow. Several financial literature focus on the issue of cash-flow sensitivity on various uses of internally generated cash flow. Firms are able to distribute their incremental cash flow to payout dividends, reimburse debt, raise equity, hold cash as precautionary savings or increase the investment to obtain the growth opportunity in the future. However, a few studies investigate the change in cash-flow sensitivity on various uses after incorporating the variation in executive compensations and other control variables. According to academic theory of incentive-pay and agency problems, CEOs have incentive to allocate more cash flow to risky investment projects in order to increase their contingent rewards if there is more free cash flow in a firm. Accordingly, we propose that cash-flow sensitivity on investment and cash holding are more volatile than other uses in firms when we take account of variation in different types of executive compensation. This proposition highlight an interesting phenomenon that overinvestment directly connects to overpayment of CEOs. Moreover, we clarify that restriction on executive compensation, perhaps reduces the agency cost but it also forces firms to reduce managerial talent or effort such that cash-flow sensitivity of various uses would rely on the type of executive compensation. Using the cash-flow sensitivity model, we find that the variation in executive compensation would change the allocation of cash flow and lead to agency problems. After controlling the firm’s characteristics, CEO’s characteristics and governance characteristics, we highlight that time varying excess executive compensation significantly explain the cash-flow sensitivity on various uses. In particular, the performance-sensitive pay (incentive-pay) induced by self-serving motivation and unobserved CEO talent is responsible for variation in cash-flow sensitivity on internal cash flow allocation.
VL  - 9
IS  - 3
ER  -

Copy | Download