CEO risk incentives and firm performance following R&D increases

Carl Hsin-han Shen, Hao Zhang*

*Corresponding author for this work

Research output: Contribution to journalArticle

16 Citations (Scopus)

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 languageEnglish
Pages (from-to)1176-1194
Number of pages19
JournalJournal of Banking and Finance
Volume37
Issue number4
DOIs
Publication statusPublished - 1 Apr 2013
Externally publishedYes

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Keywords

  • Executive compensation
  • Firm performance
  • Investment efficiency
  • Managerial incentives
  • R&D
  • Risk taking

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