Long-Term Incentive Compensation Plan Adoption And the Capital Spending Decisions of Managers
Long-Term Incentive Compensation Plan Adoption And the Capital Spending Decisions of Managers
Baril, Charles Purdom
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This linkage, however, requires an intermediate assumption. The premise of the adoption effect is that poor capital spending decisions may arise from a manager's inordinate concern with enhancing short-run earnings. Therefore, in order for poor capital spending decisions to be positively associated with poor earnings , the tenure of the manager ' s short-run orientation must be assumed to be of sufficient duration to result in the inevitable earnings decline. To the extent that poor past earnin...gs performance connotes poor capital spending decisions, the magnitude of the adoption effect will be greater for poor past earnings performance firms than for good past earnings performance firms. Hence, the following research hypothesis is posited for empirical examination. Hypothesis 3 Following the introduction of a long-term compensation plan, the unexpected capital spending levels associated with poor prior earnings performance firms will be higher than those associated with good prior earnings performance firms.
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