TY  - JOUR
AU  - Aggarwal,Rajesh K.
AU  - Samwick,Andrew A.
TI  - Empire-Builders and Shirkers:  Investment, Firm Performance, and Managerial Incentives
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7335
PY  - 1999
Y2  - September 1999
UR  - http://www.nber.org/papers/w7335
L1  - http://www.nber.org/papers/w7335.pdf
N1  - Author contact info:
Rajesh Aggarwal
Carlson School of Management
Finance
University of Minnesota
3-285 CarlSMgmt
321 19th Ave S
Minneapolis, MN 55455
Tel: 612/625-5679
E-Mail: aggar015@umn.edu

Andrew Samwick
6106 Rockefeller Hall
Department of Economics
Dartmouth College
Hanover, NH 03755-3514
Tel: 603/646-2893
Fax: 603/646-2122
E-Mail: andrew.samwick@dartmouth.edu
AB  - Do firms systematically over- or underinvest as a result of agency problems?  We develop a contracting model between shareholders and managers in which managers have private benefits or private costs of investment. Managers overinvest when they have private benefits and underinvest when they have private costs. Optimal incentive contracts mitigate the over- or underinvestment problem. We derive comparative static predictions for the equilibrium relationships between incentives from compensation, investment, and firm performance for both cases. The relationship between firm performance and managerial incentives, in isolation, is insufficient to identify whether managers have private benefits or private costs of investment. In order to identify whether managers have private benefits or costs, we estimate the joint relationships between incentives and firm performance and between incentives and investment. Our empirical results show that both firm performance and investment are increasing in managerial incentives. These results are consistent with managers having private costs of investment. We find no support for overinvestment based on private benefits.
ER  -