This paper tests whether uncertainty in the CEO’s compensation affects the firm’s investment decisions. Our new approach model measures the CEO’s earnings uncertainty using panel (cross-sectional time-series) compensation data. We pay special attention to decomposing the executives earnings uncertainty into permanent and transitory components. We then explain capital expenditures and acquisitions (investment henceforth) as a function of uncertainty, as well as firm specific characteristics. We find strong support that the firm’s investment growth is negatively related to the CEO’s earnings uncertainty.
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