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Does R&D intensity matter in the executive risk incentives and firm risk relationship?

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  • Abdoh, Hussein
  • Liu, Yu

Abstract

Executive risk incentives are widely used to encourage risk-taking in all kinds of firms, especially in research and development (R&D)-intensive firms. Executive risk incentives are commonly measured as the sensitivity of executive equity portfolios to stock return volatility (Vega). Previous studies have established a positive relationship between Vega and various firm risk measures, whereas the impact of R&D on this relationship remains unknown. Using an updated dataset of S&P listed firms from 1993 to 2017, we examine whether and how the relationship between Vega and firm risk varies with R&D investments. We find that a higher Vega encourages executives to take increased total risk in R&D-intensive firms. Specifically, a higher Vega encourages executives to increase total risk by undertaking R&D projects characterized by systematic rather than idiosyncratic risk, while higher systematic risk is associated with lower firm values and higher financing costs. In sum, this study sheds light on a previously unexplored dark side of executive risk incentives in R&D-intensive firms.

Suggested Citation

  • Abdoh, Hussein & Liu, Yu, 2021. "Does R&D intensity matter in the executive risk incentives and firm risk relationship?," Economic Modelling, Elsevier, vol. 96(C), pages 13-24.
    • Handle: RePEc:eee:ecmode:v:96:y:2021:i:c:p:13-24
    DOI: 10.1016/j.econmod.2020.12.025
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    More about this item

    Keywords

    Executive risk incentives; Vega; R&D; Firm risk; Systematic risk; Idiosyncratic risk;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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