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Business strategy, over- (Under-) investment, and managerial compensation

Version 2 2024-06-04, 11:11
Version 1 2017-07-23, 23:09
journal contribution
posted on 2024-06-04, 11:11 authored by F Navissi, VG Sridharan, M Khedmati, Edwin LimEdwin Lim, Egor EvdokimovEgor Evdokimov
ABSTRACT This study examines whether and how business strategy influences a firm's over- and under-investment decisions. Prospector and defender strategies expose firms to different required levels of investment, monitoring, and managerial discretion, which have implications for managerial investment decisions. Our results provide evidence that firms with an innovation-orientated prospector strategy are more likely to over-invest, whereas firms following an efficiency-orientated defender strategy are more likely to under-invest. These over- and under-investments are associated with poorer future firm performance. Moreover, the level of over- (under-) investment is exacerbated in the presence of more stock- (cash-) based compensation in prospector (defender) firms. Our results are robust to a number of checks such as ordered logit analysis, individual components of business strategy, individual components of investment, year-by-year and industry-by-industry analysis, controlling for lagged investment residuals, controlling for firm fixed-effects, first-differenced specifications, and propensity score matching.

History

Journal

Journal of Management Accounting Research

Volume

29

Season

Summer 2017

Pagination

63-86

Location

Sarastota, Fla.

ISSN

1049-2127

eISSN

1558-8033

Language

English

Publication classification

C1 Refereed article in a scholarly journal

Copyright notice

[2016, American Accounting Association]

Issue

2

Publisher

AMER ACCOUNTING ASSOC