The Role of Equity Compensation in Reducing Inefficient Investment in Labour

This thesis examines whether equity compensation incentivises executives to make efficient labour investment decisions. Specifically, it examines whether the components of equity compensation — stock options and restricted stock — affect over- and under-investment in labour. Based on a sample of 12118 firm-year observations from 1992 to 2014, it is found that stock options exacerbate over-investment and mitigate under-investment in labour. In contrast, restricted stock is found to mitigate both over- and under-investment in labour. Overall, the findings demonstrate that stock options and restricted stock matter in executives’ labour investment decisions.