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The Role of Performance Plans in Mitigating Agency Problems: An Empirical Examination

Sanjay Gupta and Charles D. Bailey
Quarterly Journal of Business and Economics
Vol. 40, No. 3/4 (Summer - Autumn, 2001), pp. 79-99
Published by: Creighton University
Stable URL: http://www.jstor.org/stable/40473335
Page Count: 21
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
The Role of Performance Plans in Mitigating Agency Problems: An Empirical Examination
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Abstract

This paper examines the role of performance plans in mitigating managers' short-term decision orientation and risk-averse behavior. With capital expenditure levels as a proxy for long-term decision orientation, the study uses regression analysis to examine a period of eight years surrounding the adoption of a performance plan. The results indicate a greater post-adoption increase in capital expenditures for adopting than for non-adopting firms. Two moderating factors, investment opportunity set and internally generated cash, are found to be important; performance plans appear to align capital expenditures with the availability of investment opportunities and internal cash. Performance plan adoption decreases total and systematic risk, however, indicating that managers of adopting firms may become more risk-averse.

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