The Association Between Shielding, Equity Compensation, Corporate Governance And R&D Investment

• In Event: SESSION 7D: Executive Compensation

Abstract

Prior accounting research (i.e., Dechow, et al. 1994; Duru et al. 2002; Adut et al. 2003 and Cheng 2004) demonstrates that compensation committees (CC) commonly shield executive (CEO) cash compensation (Salary and Bonus) from the deleterious effects of value enhancing expenditures. I extend the research by examining if compensation committees use bonus shielding to calibrate R&D investment.
To test the hypotheses, I utilize a sample of firms from Execucomp for the time period 1992-2008, in both cross-sectional and temporal tests. Sensitivity tests are conducted using hand collected data from Forbes for the time period 1972-2008. With respect to R&D productivity I find that firms with negative mean abnormal R&D (i.e. firms that underspend in R&D) have higher R&D productivity than firms with positive mean abnormal R&D (i.e. firms which overspend in R&D). Further, in temporal tests I find that firms increase (decrease) actual R&D spending in response to increases (decreases) in target R&D. Furthermore, I find that shielding increases actual R&D sensitivity to target R&D compared to non-shielding firms. Additionally, I find that corporate governance mechanisms do not impact R&D investment in either cross sectional tests or temporal tests.
Finally, sensitivity analysis provides more robust results with respect to both 1) R&D productivity of mean negative abnormal R&D firms over mean positive abnormal R&D firms, and 2) temporal tests of target R&D influences on actual R&D.

Author

• Paul Arthur San Miguel, Western Michigan University