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Equity compensation and the sensitivity of research and development to financial market frictions

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  • O’Connor, Matthew
  • Rafferty, Matthew
  • Sheikh, Aamer

Abstract

When financial market frictions exist, executives may have to decide which investment activities to reduce when internal funds decrease. Expenditures on research and development (R&D) may be particularly vulnerable because of the long-term nature of innovative activity. We find that equity compensation is associated with lower levels of firm R&D expenditures. Rewarding executives to incur more risk has little effect on R&D expenditures, but rewarding executives for higher returns reduces R&D expenditures and makes R&D expenditures more sensitive to financial market frictions. In contrast, cash compensation reduces the sensitivity of R&D expenditures to financial market frictions.

Suggested Citation

  • O’Connor, Matthew & Rafferty, Matthew & Sheikh, Aamer, 2013. "Equity compensation and the sensitivity of research and development to financial market frictions," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2510-2519.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:7:p:2510-2519
    DOI: 10.1016/j.jbankfin.2013.02.005
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    More about this item

    Keywords

    Equity compensation; Financial constraints; Research and development;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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