Top management team incentive similarity and underinvestment
Abstract
Prior research suggests that similarity in pay-performance sensitivities (PPS) among top management team (TMT) members enhances their collaboration. Building on this, the authors aim to use PPS similarity as a proxy for TMT collaboration to investigate its impact on corporate underinvestment. Using a sample of Chinese listed firms from 2007 to 2022, the authors test the relationship between similar PPS and underinvestment. The authors find that TMT collaboration is significantly and negatively associated with underinvestment. The authors’ mechanism tests suggest that this relationship is driven by two key mechanisms: improved managerial efficiency and alleviated financing constraints. Furthermore, the authors’ cross-sectional analyses reveal that the mitigating effect of TMT collaboration on underinvestment is more pronounced in environments with higher social trust, in firms with higher accounting information quality and in teams with longer tenure. Overall, the authors’ study moves beyond the traditional focus on individual executive incentives to demonstrate that the consistency of a team’s incentive structure is a key governance mechanism, offering novel insights from a collective perspective for understanding and mitigating corporate underinvestment.