Article2004

R&D Expenditures and CEO Compensation

479 citations0/0 files storedThe Accounting Review

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Corporate Finance and Governance Auditing, Earnings Management, Governance Accounting and Organizational Management

Abstract

This study investigates whether compensation committees seek to prevent opportunistic reductions in R&D expenditures. I hypothesize that changes in R&D spending are more strongly positively associated with changes in CEO compensation in two situations: (1) when the CEO approaches retirement, and (2) when the firm faces a small earnings decline or a small loss. Consistent with these hypotheses, the results indicate that the association between changes in R&D spending and changes in the value of CEO annual option grants is significantly positive in the above two situations, and insignificant otherwise. Similar results hold for changes in CEO annual total compensation. The results also show that neither situation is associated with reduced R&D spending. Overall, these findings suggest that compensation committees respond to, and effectively mitigate, potential opportunistic reductions in R&D spending.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1973The Pricing of Options and Corporate Liabilities 1990Performance Pay and Top-Management Incentives 1997Earnings management to avoid earnings decreases and losses 1989Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior 2008Executive compensation 1996The capitalization, amortization, and value-relevance of R&D 2000Earnings Management: Reconciling the Views of Accounting Academics, Practitioners, and Regulators

Cited by

2011Seeking safety: The relation between CEO inside debt holdings and the riskiness of firm investment and financial policies 2006Does Hiring a New CFO Change Things? An Investigation of Changes in Discretionary Accruals 2009Accounting and Control, Entrepreneurship and Innovation: Venturing into New Research Opportunities 2010CEO decision horizon and firm performance: An empirical investigation 2008Board Independence and Real Earnings Management: The Case of R&D Expenditure 2007

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