Stock Market Mispricing, Executive Compensation and Corporate Investment: Evidence from Australia

Abstract

This paper empirically investigates the relation between stock mispricing, the compensation of executives and directors, and corporate investment using Australian data. We find no significant relation between investment level and stock mispricing as measured by the nonfundamental component in the firm's Q ratio. We also document a significant positive relation between the magnitude of equity-based compensation, measured as the percentage of the market value of a firm's equity, and the investment level. The results suggest that managers make investment decisions that do not cater to stock market mispricing but rather that concern their equity-based compensation.