R&D expenditures and CEO compensation policy: The effect of corporate control and market competition on managerial opportunism

Hsiao Wen Wang*, Hsin Yu Chen, Shu Hsing Li

*Corresponding author for this work

Research output: Contribution to journalJournal Article peer-review

1 Scopus citations

Abstract

China and Taiwan (so-called Greater China) are representative of two of the fastest-growing economies in the Pacific Rim region. This study uses Taiwanese high-tech firms as sample and explores whether boards of directors attempt to avoid opportunistic reductions in research and development (R&D) investments by CEOs. This study considers a scenario in which high-tech firms face a small earnings decline or a small loss but their CEOs could opportunistically cut R&D investments to improve financial results. The focus of this study is to examine how corporate control (whether or not a firm is controlled by a family) and market competition affect the relationship between R&D investments and CEO compensation schemes. Overall, we find that the stock-based incentive compensation is more effective than the cash compensation in deterring managerial opportunism. In non-family firms, we find there exists a positive significant relationship between changes in R&D expenditures and changes in CEO stock-based compensation when a firm is faced with a small earnings decline or a small loss. Specifically, compared to family firms, the boards of directors of non-family firms face more severe agency problems (as a result of the separation of ownership and control) and therefore tend to significantly adjust the incentive components in CEO compensation schemes to deter managerial opportunism. Regarding the effect of market competition, we find that incentives to adjust compensation plan to remove CEOs from opportunistically reducing discretionary R&D investments are greater in firms facing more intense market competition.

Original languageEnglish
Pages (from-to)3625-3644
Number of pages20
JournalManagerial and Decision Economics
Volume44
Issue number6
DOIs
StatePublished - 09 2023
Externally publishedYes

Bibliographical note

Publisher Copyright:
© 2023 John Wiley & Sons Ltd.

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