THE ROLE OF STOCK-BASED COMPENSATION IN DETERMINING THE EFFECT OF FINANCIAL REVENUES AND NET FINANCIAL PAYOUTS ON INVESTMENT EFFICIENCY

Abstract

This study examines the interacting role of stock-based compensation in explaining the effect of financial revenues and net financial payouts on investment efficiency and underinvestment. This study employs annual panel firm-level data for US NFCs from 1999 to 2018. The current study evaluates the hypotheses through the cumulant and generalized method of moment estimators. The results reveal that financial revenues do not affect investment efficiency and underinvestment. While the net financial payouts reduce investment efficiency and increase underinvestment. The results also suggest that stock-based compensation is unable to modify the effect of financial revenues on investment efficiency and underinvestment. Similarly, stock-based compensation does not influence the relationship between net financial payouts and investment efficiency. However, stock-based compensation enhances the positive effect of net financial payouts on underinvestment. During high uncertainty, the interacting effect of net financial payouts and stock-based compensation improves the investment efficiency and reduces the underinvestment. This relationship weakens during low uncertainty. Findings of the current study are consistent among financially constrained and unconstrained firms. These findings are also robust to the reverse causality issue