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CEO risk incentives and firm performance following R&D increases

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  • Shen, Carl Hsin-han
  • Zhang, Hao

Abstract

In this study we analyze how CEO risk incentives affect the efficiency of research and development (R&D) investments. We examine a sample of 843 cases in which firms increase their R&D investments by an economically significant amount over the period of 1995–2006. We find that firms with higher sensitivity of CEO compensation portfolio value to stock volatility (vega) are more likely to have large increases in R&D investments. More importantly, we find that high-vega firms experience lower abnormal stock returns and lower operating performance compared to their low-vega counterparts following the R&D increases. Our main results hold in a variety of robustness tests. The results are consistent with the conjecture that high-vega compensation portfolios may induce managers to overinvest in inefficient R&D projects and therefore hurt firm performance.

Suggested Citation

  • Shen, Carl Hsin-han & Zhang, Hao, 2013. "CEO risk incentives and firm performance following R&D increases," Journal of Banking & Finance, Elsevier, vol. 37(4), pages 1176-1194.
  • Handle: RePEc:eee:jbfina:v:37:y:2013:i:4:p:1176-1194
    DOI: 10.1016/j.jbankfin.2012.11.018
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    15. Bruce K. Billings & James R. Moon & Richard M. Morton & Dana M. Wallace, 2020. "Can Employee Stock Options Contribute to Less Risk‐Taking?†," Contemporary Accounting Research, John Wiley & Sons, vol. 37(3), pages 1658-1686, September.
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    20. Ciaran Driver & Maria João Coelho Guedes, 2017. "R&D and CEO departure date: do financial incentives make CEOs more opportunistic?," Industrial and Corporate Change, Oxford University Press, vol. 26(5), pages 801-820.
    21. David Hillier & Patrick McColgan & Athanasios Tsekeris, 2022. "How did the Sarbanes–Oxley Act affect managerial incentives? Evidence from corporate acquisitions," Review of Quantitative Finance and Accounting, Springer, vol. 58(4), pages 1395-1450, May.
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    More about this item

    Keywords

    Executive compensation; Managerial incentives; Risk taking; R&D; Investment efficiency; Firm performance;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • 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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