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

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

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.

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 37 (2013)
Issue (Month): 7 ()
Pages: 2510-2519

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Handle: RePEc:eee:jbfina:v:37:y:2013:i:7:p:2510-2519
DOI: 10.1016/j.jbankfin.2013.02.005
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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