Make or buy new technology: The role of CEO compensation contract in a firm's route to innovation

• 成果类型: Article
• 署名作者: Xue, Yanfeng
• 署名单位: University of Texas System; University of Texas Austin
• 刊物名称: REVIEW OF ACCOUNTING STUDIES
• ISSN/ISSBN: 1380-6653
• DOI: 10.1007/s11142-007-9039-y
• 发表日期: 2007
• 页码: 659-690
• 关键词: research-and-development; AGENCY COSTS; acquisitions; incentives; finance; RISK

摘要

A firm's board of directors, based on its risk tolerance or appetite, sets the corporate objectives. It is then the management's job to meet the objectives by adopting appropriate strategies. However, the board can design compensation policies to encourage desired management strategy choices. This paper explores the extent to which management compensation policies are aligned with strategy choices for obtaining new technology. Finns obtain new technology either through internal R&D or through acquisitions, often labeled make and buy strategies, respectively. The make strategy is inherently more risky, with much of the high risk idiosyncratic. Furthermore, U.S. GAAP requires that R&D expenditures be expensed but allows capitalization of acquisition costs, thus a firm using the I make as opposed to the buy strategy will experience a greater negative effect on accounting earnings. I hypothesize that these differences will lead risk-averse and utility-maximizing managers to implement the buy strategy if their compensation is heavily weighted on accounting-based performance measures. Conversely, managers with more stock-based compensation, especially stock options, are more likely to choose to develop new technology internally. Using data from U.S. high-tech industries and a simultaneous equations regression framework, I find evidence consistent with the above hypotheses.