Investment opportunities and the structure of executive compensation

Baber, William R.; Janakiraman, Surya N.; Kang, Sok Hyon

doi:10.1016/0165-4101(96)00421-1

Cited by 401 publications

(289 citation statements)

References 19 publications

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“…Various studies find that R&D expenditures offer a great opportunity for growth (McConnell and Musurella, 1985 ;Smith and Watts, 1992 ;Baber et al, 1996;Ho et al, 2006) , improve benefit (Connolly and Hirshey, 1984 ;Chan et al, 1990;Sougiannis, 1994;Chan et al, 2001), productivity (Sougiannis, 1994 ;Lev, 1999 ;Aboody et Lev, 2000 ;Ding et al, 2003 ;Ding et al, 2007), and stock performance (Ben-Zion, 1978;Griliches, 1981;Hirschey, 1982). However, the nature of R&D investments highlights the importance of R&D discretion.…”

Section: Introductionmentioning

confidence: 99%

R D expenditures and earnings targets: evidence from France

Guidara¹

2015

Pressacademia

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Research and development (R&D) investments reduce current-period earnings while the benefits associated with the investments occur in the future. This problem implies an earnings management tool to boost short-term performance. While there is much evidence regarding managerial discretion through R&D capitalization, empirical studies that directly examine managerial discretion through R&D expenditure adjusting have not been widely provided in the European context. This paper seeks to determine if earnings targets influence R&D investment by encouraging R&D cuts after IFRS adoption. Focusing on a French setting, where companies invest heavily in R&D, results show that managers tend to cut the R&D expenditures in order to achieve earnings target. Studying two earnings management incentives: avoidance of losses (positive earnings target) and earnings decreases (positive earning growths target), findings support thresholds assumption and provide evidence on real earnings management through R&D expensing. This empirical research contributes to the literature by providing further evidence that post-FRS, R&D cut is a strategic decision influenced by earnings management to boost performance.

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Section: Introductionmentioning

confidence: 99%

R D expenditures and earnings targets: evidence from France

Guidara¹

2015

Pressacademia

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“…To measure investment opportunities, we use the market-to-book ratio and, alternatively, research and development expenditures scaled by the market value of the firm, consistent with prior studies (e.g., Gaver and Gaver, 1993;Baber, Janakiraman, and Kang, 1996).…”

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confidence: 99%

Non-Management Director Options, Board Characteristics, and Future Firm Investments and Performance

Bryan

Klein

2004

SSRN Journal

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Non-Management Director Options, Board Characteristics, and Future Firm Investments and PerformanceThis paper examines if non-management director pay packages are set in ways consistent with the optimal contracting theory. Under this theory, directors issue stock option grants as a means for providing non-management directors incentives to monitor adequately the risk-taking and investment opportunities that managers of the firm undertake. Our results are consistent with this theory. Using a sample of over 5200 observations between 1997 and 2002, we find that (1) agency costs differ substantially across our sample, (2) boards systematically set their compensation contracts to address these agency costs, and (3) significantly positive links exist between the ratio of current stock option grants-to-total compensation and seven future investment, risk and firm performance variables. The investment variables are next period's change in research and development expenditures and change in capital expenditures. The risk variable is next year's stock return volatility. The firm performance variables are next period's Tobin's Q ratio, return on assets (ROA), a market return on current investments, and this period's stock return. Our results are incremental to board characteristics, CEO stock option grants, and economic, firm-specific, yearly, and industry control factors.

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“…Empirical studies that explore the role of agency costs in compensation arrangements include Lewellen, Loderer, and Martin 1987;Smith and Watts 1992;Sloan 1993;Gaver and Gaver 1993;Matsunaga 1995;Yermack 1995;Baber, Janakiraman, and Kang 1996;and Bushman, Indjejikian, and Smith 1996. These studies formed the basis of our controls for agency costs.…”

Section: Control Variablesmentioning

confidence: 99%

“…Growth opportunities are also considered to be related to agency costs due to information asymmetry between managers and capital providers over the future investment opportunities of the firm. Variables commonly used to proxy for growth opportunities include the five-year logarithmic growth in total assets (Lambert and Larcker 1987), the book-to-market ratio (Lewellen et al 1987;Smith and Watts 1992;Gaver and Gaver 1993), and an indicator variable for research and development firms (Gaver and Gaver 1993;Baber et al 1996;Bushman et al 1996;Douglas et al 1997). An indicator variable was used to avoid constraining the influence of the highly skewed R&D expense (even when deflated) to be linear.…”

Section: Control Variablesmentioning

confidence: 99%

“…Principal factor analysis (more commonly referred to as simply "factor analysis") has been used in accounting research to create a single variable from several proxies. For example, both Gaver and Gaver (1993) and Baber et al (1996) create a single measure of the firm's investment opportunity set from four and six proxies, respectively. Major disadvantages of factor analysis are its inability to incorporate the correlation of the proxies with the dependent variable in the regression model, and the difficulty in interpreting the factor variables.…”

Section: Control Variablesmentioning

confidence: 99%

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The Impact of Financial and Tax Reporting Incentives on Option Grants to Canadian CEOs

KLASSEN¹,

Waterloo²,

MAWANI³

et al. 2000

Contemporary Accounting Research

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This study explores the effects of financial and tax reporting incentives on options granted to chief executive officers in Canada. Extant studies with a similar objective (Yermack 1995;Matsunaga 1995) explore predominantly nonqualified U.S. option grants that are deductible to the extent that the options are in the money at the time of exercise. In contrast, Canadian firms do not get a tax deduction for their stock option grants at any time. In both countries, no expense is recorded for financial reporting purposes. As a result, the financial reporting and tax reporting trade-off is more pronounced in the Canadian setting of this study compared with the U.S. setting.We measure option granting behavior as the ratio of the Black-Scholes value of stock option grants to the sum of cash compensation and the value of stock option grants. Using a sample of 806 firm-year observations during the period 1993-95, we find that observed option grants are significantly correlated with proxies for short-run financial reporting incentives. We also find evidence that option granting behavior is correlated with proxies for tax incentives. Keywords Stock options; Taxation; Financial reporting; Hypothesis testing CondenséLe recours aux options d'achat d'actions dans le régime de rémunération des cadres peut augmenter le bénéfice déclaré dans le contexte de l'information financière puisque la charge au titre des salaires afférente aux options dans l'état des résultats est habituellement nulle. Il se peut donc que les sociétés plus sensibles au bénéfice déclaré (c'est-à-dire celles pour qui les coûts de l'information financière sont plus élevés) soient davantage susceptibles d'octroyer à leurs cadres des options d'achat d'actions, de manière à éviter la constatation Plus précisément, le contexte canadien est fort différent du contexte des États-Unis sur lequel se sont penchés Yermack (1995) et Matsunaga (1995. Ces derniers testent dans leurs études les données des États-Unis relatives à l'octroi d'options majoritairement sans restriction dont l'avantage connexe peut être déduit par la société au moment de la levée. Les auteurs de la présente étude, au contraire, examinent les options octroyées au Canada pour lesquelles aucune déduction fiscale n'est permise au moment de la levée. Le recours aux options exige donc des sociétés canadiennes qu'elles parviennent à un compromis entre les avantages de l'information financière et les coûts fiscaux, tandis que le recours aux options sans restriction aux États-Unis offre le meilleur des deux mondes (la déductibilité fiscale et aucune charge dans l'état des résultats). En conséquence, l'élément fiscal dissuasif que comporte l'octroi d'options devrait être plus accentué dans la présente étude que dans celle de Yermack (1995) ou de Matsunaga (1995). Le principal apport des auteurs est ici de documenter les conséquences de l'absence de déduction fiscale sur l'octroi par les sociétés d'options d'achat d'actions aux cadres. Les auteurs recueillent également d'autres faits démontrant l'inci...

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Investment opportunities and the structure of executive compensation

Cited by 401 publications

References 19 publications

R D expenditures and earnings targets: evidence from France

R D expenditures and earnings targets: evidence from France

Non-Management Director Options, Board Characteristics, and Future Firm Investments and Performance

The Impact of Financial and Tax Reporting Incentives on Option Grants to Canadian CEOs

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