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Make or Buy New Technology Â€Ó a CEO Compensation Contract€ٳ Role in a Firm€ٳ Route to Innovation

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  • Xue, Yanfeng
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    Abstract

    Firms obtain new technology either through internal R&D or through acquisitions. These two approaches are usually labeled as "make" and "buy" strategies. In this paper, I examine the relation between a firm's choice of "make" or "buy" and the performance measures used in the firm's CEO compensation contract. I focus on the two major differences between "make" and "buy" strategies: the risk levels and accounting treatments. I then examine the differential implications of accounting-based and stock-based performance measures on managers' incentive in choosing between the two strategies. Using data from US high tech industries, I find that, firms relying on "buy" approach to obtain technology tend to depend more on the accounting-based performance measures, while those firms who innovate through R&D activities skew toward stock-based pay especially stock options

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    File URL: http://hdl.handle.net/1721.1/4049
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    Bibliographic Info

    Paper provided by Massachusetts Institute of Technology (MIT), Sloan School of Management in its series Working papers with number 4436-03.

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    Date of creation: 13 Feb 2004
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    Handle: RePEc:mit:sloanp:4049

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    Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), SLOAN SCHOOL OF MANAGEMENT, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA
    Phone: 617-253-2659
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    Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), SLOAN SCHOOL OF MANAGEMENT, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA

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    Keywords: R&D; Acquisition; Compensation; Technology;

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    1. Holmstrom, Bengt, 1989. "Agency costs and innovation," Journal of Economic Behavior & Organization, Elsevier, vol. 12(3), pages 305-327, December.
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