7 Conclusion
Corporate investments are decisions and activities crucial to firms’ continuing growth and long-term development. To maintain growth and preserve a competitive status in industries, risk-neutral shareholders motivate risk-averse managers to engage in certain levels of investments and take advantage of favorable investment opportunities (Core and Guay 1999; Coles et al. 2006). Relying on the managerial ability measure developed by Demerjian et al. (2012), I examine whether and how CEO managerial ability affects corporate investment practices by improving investment efficiency. I predict that more able CEOs are likely to make more efficient corporate investment decisions due to their greater ability to anticipate changes in their firms’ underlying economy, to identify favorable investment opportunities to support the internal and external growth of their firms, and to perform accurate and sufficient evaluation work.
Consistent with this prediction, I show that high ability CEOs increase (decrease) capital expenditures, acquisition expenditures, and total investments when the firm is more likely to under-invest (over-invest). This is not the case, however, for R&Ds. These results provide evidence that higher ability CEOs can improve investment efficiency when the firm has a tendency to under-invest and/or over-invest. Additional analyses show that the positive impact of CEO managerial ability on investment efficiency generally persists across different levels of monitoring strength, while it gets weaker as CEOs are overly exposed to equity risk. Overall, the findings of this study suggest that CEO managerial ability plays a significant role in improving investment decision-making. This is in line with the notion that individual-level factors affect investment practices and outcomes, highlighting the importance of managerial ability in the corporate investment context.
