The design of bonuses and its implications for investment choices

In the wake of Enron and other high profile corporate scandals executive compensation has become a key strategic issue for market participants and regulators all around the world. This paper re-addresses a very significant, and often controversial issue, namely the impact of managerial bonuses on corporate investment decisions. In doing so, it critically examines two related sets of hypotheses, the “fixed-target” and “ratcheting-target” hypotheses. The comparison of the above predictions reveals a contradiction, which in turn consists a subject of future empirical research.