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Equity compensation and the sensitivity of research and development to financial market frictions

O’Connor, Matthew, Matthew Rafferty and Aamer Sheikh

Journal of Banking & Finance, 2013, vol. 37, issue 7, 2510-2519

Abstract: When financial market frictions exist, executives may have to decide which investment activities to reduce when internal funds decrease. Expenditures on research and development (R&D) may be particularly vulnerable because of the long-term nature of innovative activity. We find that equity compensation is associated with lower levels of firm R&D expenditures. Rewarding executives to incur more risk has little effect on R&D expenditures, but rewarding executives for higher returns reduces R&D expenditures and makes R&D expenditures more sensitive to financial market frictions. In contrast, cash compensation reduces the sensitivity of R&D expenditures to financial market frictions.

Keywords: Equity compensation; Financial constraints; Research and development (search for similar items in EconPapers)
JEL-codes: G3 O3 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:7:p:2510-2519

DOI: 10.1016/j.jbankfin.2013.02.005

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