Document Type : Research Paper
Authors
1 Professor of Accounting Faculty of Commerce and Finance University of Tehran
2 Department of Accounting, KAR Higher Education Institute, Qazvin, Iran.
Abstract
Objective: Efficiency is one of the most important criteria that investors look for influencing factors to find suitable investment opportunities. Since managers have an effective role in making company decisions, they may deviate from optimal investment decisions. Therefore, the purpose of this research is to investigate the relationship between CEO power and overinvestment. For this purpose, to explain the relationship between the CEO's power and overinvestment, three different effects have been discussed: the discretion effect, the risk aversion effect, and the ability effect.
Methodology: The current research is descriptive of the correlational type and based on the objective of the applied type and has been conducted in a post-event method. In order to achieve the goal of the research, 123 companies admitted to the Tehran Stock Exchange were examined between 2016 and 2022. To check and analyze the data, the Eviews software was used, and to estimate the patterns, regression analysis with combined data was used.
Findings: The results show that there is a negative and significant relationship between CEO power and investment inefficiency (overinvestment). Also, this relationship is not nonlinear.
Originality / Value: The findings show that stronger CEOs who have more discretionary control (discretion effect) to engage in decisions based on their personal interests rather than stockholders do not harm shareholders’ interests by gaining personal benefits through overinvestment. Indeed, because of the risk aversion and ability effects, the private benefits of powerful CEOs are naturally aligned with shareholders’ interests, and they are then less likely to overinvest.
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