Template-Type: ReDIF-Paper 1.0
Title: Capital (Mis)allocation, Incentives and Productivity
Author-Name: Jan Schymik
Author-Email: jan.schymik@uni-mannheim.de
Author-Name: Matthias Meier
Author-Email: m.meier@uni-mannheim.de
Author-Name: Alexander Schramm
Author-Email: aschramm@munichre.de
Author-Name: Alexander Schwemmer
Author-Email: alexander.schwemmer@bmf.bund.de

Classification-JEL: D25, E22, E32, G31.
Keywords: Investment, Firms, Managerial Pay, Capital Misallocation.

Abstract: This paper studies how managerial pay shapes the allocation of capital within firms.
We leverage quasi-experimental variation in the composition of managerial pay between
cash bonuses and equity compensation. We find that a relative increase in cash bonuses
leads firms to reallocate capital toward less durable investment projects. To rationalize
the empirical evidence, we develop a quantitative model with agency frictions. In the
model, a relative increase in cash bonuses strengthens managerial short-termism, which
shifts the investment composition toward less durable projects. The observed change
in managerial pay exacerbates within-firm capital misallocation and leads to a sizeable
contraction in output.

Note: 
Length: 58
Creation-Date: 2025-01
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp637
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2025_637