Managerial incentives and investment policy in family firms: evidence from a structural analysis

Wu, B. H.T. and Mazur, M. (2018) Managerial incentives and investment policy in family firms: evidence from a structural analysis. Journal of Small Business Management, 56(4), pp. 618-657. (doi: 10.1111/jsbm.12308)

Abstract

This paper provides evidence that CEO incentive pay mediates the effect of family preferences on corporate investment policy. Our study focuses on the option portfolio volatility sensitivity vega, which motivates the risk-taking behavior of undiversified managers. After controlling for factors that affect incentive pay and investment policy simultaneously, we find that one-third of underinvestment in riskier R&D projects in active family firms can be attributed to a significantly lower vega. Passive family firms allocate more capital to R&D as opposed to active family firms, and are more active in M&A deal making. In contrast to many prior studies, pay incentives and families are not associated with capital expenditures. Overall, our empirical results suggest that CEO pay incentives induce investment policy contingent on firm risk. Family CEO incentive pay manifests the family preference for lower risk, especially in firms with higher firm risk. Nonetheless, after replacing family CEOs with outside professionals, investments in both R&D and M&A increase, which is consistent with the family preference for extended investment horizons. Interestingly, such a preference seems not to be manifested in incentive pay.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Wu, Dr Betty
• Authors: Wu, B. H.T., and Mazur, M.
• College/School: College of Social Sciences > Adam Smith Business School > Accounting and Finance
• Journal Name: Journal of Small Business Management
• Publisher: Wiley-Blackwell Publishing, Inc.
• ISSN: 0047-2778
• ISSN (Online): 1540-627X
• Published Online: 09 November 2016
• Copyright Holders: Copyright © 2016 John Wiley & Sons Inc
• First Published: First published in Journal of Small Business Management 56(4):618-657
• Publisher Policy: Reproduced in accordance with the copyright policy of the publisher