Relationship between R&D Capitalization and R&D Overinvestment in the Software Industry: The Effect of Executive Equity-Based Compensation
Chia-Hui Chen/Department of Accounting, National Dong Hwa University
Liu-Ching Tsai/Department of Banking and Finance, National Chia-Yi University
Chaur-Shiuh Young/Department of Accountancy and Graduate Institute of Finance, National Cheng Kung University
Hui-Wen Hsu/Department of Public Finance, Feng Chia University
Abstract
Prior studies show that immediate expensing of R&D expenditures creates R&D underinvestment problems. In contrast, from data on firms listed in the U.S. software industry for 2001 to 2011, we provide evidence that R&D capitalization is positively associated with R&D overinvestment. This evidence sheds light on one kind of agency problem- R&D overinvestment- caused by R&D capitalization decisions and, in turn, provides implications for investors and regulators in assessing the consequences of R&D capitalization. Moreover, we examine the effect of executive equity-based compensation on mitigating such agency problem. Our results support that executive equity-based compensation serves as an important mechanism to alleviate R&D overinvestment problems driven by R&D capitalization. This evidence is of value to firms’ compensation committees in designing executive compensation structures to motivate managers’ R&D investment decisions from long-term perspectives. We finally conduct additional tests to ensure that our empirical results are robust to potential endogeneity concerns and competing explanations.
Keywords
R&D ExpendituresR&D CapitalizationOverinvestmentExecutive Equity-Based Compensation
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