Managerial incentives, R&D investments and cash flows

Abstract

Purpose

The purpose of this paper is to investigate how managerial risk-taking incentives affect the sensitivity of R&D investments to the availability of a firm’s internal finance.

Design/methodology/approach

The author studies a large panel sample of US firms from 1992 to 2013 using a dynamic structural model and estimates a system GMM estimator that accounts for unobserved firm-specific effects, and that allows the author to address the potential endogeneity of all of the financial and executive compensation variables.

Findings

Managerial risk-taking incentives, in particular CEO portfolio vega, have a significantly positive impact on the financial constraints that bind R&D investments. Moreover, the author finds that CEO portfolio vega has stronger impacts on the investment-cash flow sensitivity of R&D in firms that are more likely to face binding financial constraints.

Originality/value

Prior studies on the financial constraints of R&D investments do not consider the potential impact of executive compensation on R&D investments. The author complements this stream of literature by providing novel results showing that managerial risk-taking incentives have a significant impact on the severity of the financial constraints on R&D investments.

Citation

Chen, L. (2017), "Managerial incentives, R&D investments and cash flows", Managerial Finance, Vol. 43 No. 8, pp. 898-913. https://doi.org/10.1108/MF-01-2017-0010