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.
Original language | English |
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Pages (from-to) | 1176-1194 |
Number of pages | 19 |
Journal | Journal of Banking and Finance |
Volume | 37 |
Issue number | 4 |
DOIs | |
Publication status | Published - 1 Apr 2013 |
Externally published | Yes |
Keywords
- Executive compensation
- Firm performance
- Investment efficiency
- Managerial incentives
- R&D
- Risk taking