The association between shielding, equity compensation, corporate governance and R&D investment




San Miguel, Paul A.

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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. In this dissertation, I extend the research by examining if compensation committees use bonus shielding to calibrate R&D investment.

To test the hypotheses/research questions developed in this dissertation, 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. The results of this dissertation are summarized as follows. 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.


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Corporate Governance, Equity Compensation, Executive Compensation, R&D Investment, Shielding