The Effect of Capital Market Pressures on the Association between R&D Spending and CEO Option Compensation

Posted: 25 Jul 2011

See all articles by Jian Cao

Jian Cao

Florida Atlantic University

Indrarini Laksmana

Kent State University - Department of Accounting

Date Written: August 5, 2009

Abstract

We examine the effect of capital market pressures for meeting earnings benchmarks on the relationship between R&D spending and CEO option compensation. We consider a particular scenario when firms face small earnings declines but could opportunistically reduce R&D spending to increase reported earnings. We find that firms with income reporting concerns punish their CEOs with lower option compensation when R&D spending increases but reported earnings decreases. Further, for firms with income reporting concerns, we find that the penalty for increasing R&D is greater when the firms frequently miss quarterly earnings benchmarks in the year. Overall, our findings suggest that the adverse consequence on CEO options encourages short-run compensation-motivated actions to eliminate or postpone R&D projects with positive net present values.

Keywords: R&D Expenditures, CEO Option Compensation, Earnings Benchmarks

Suggested Citation

Cao, Jian and Laksmana, Indrarini, The Effect of Capital Market Pressures on the Association between R&D Spending and CEO Option Compensation (August 5, 2009). Review of Quantitative Finance and Accounting, Vol. 34, No. 2, 2010, Available at SSRN: https://ssrn.com/abstract=1895045

Jian Cao

Florida Atlantic University ( email )

777 Glades Rd.
Boca Raton, FL 33431
United States
561-297-3727 (Phone)

Indrarini Laksmana (Contact Author)

Kent State University - Department of Accounting ( email )

P.O. Box 5190
Kent, OH 44242-0001
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
1,127
PlumX Metrics