Managerial Power and Investment Inefficiency: Reconciling Theory and Evidence

Abstract

The extant corporate investment literature documented that agency conflicts of managers from making optimal investment decisions. This study aims to investigate the influence of managerial power on the efficiency of investment strategy. The analysis, we obtained an unbalanced panel comprising 35 conglomerates (206 companies), conducted in the period 2005 to 2014. The empirical find that managers in good subsidiaries tend to be more conservative and are apt to underinvest. However, in bad subsidiaries, managers having stronger power are more likely to overinvest. Due to the contingency perspective of corporation targets in good subsidiaries, managers may increase their investments to expand firm size and control more resources. On the contrary, low-power managers tend to underinvest their businesses since they lack complete decision-making power.