R&D investment around CEO turnover.

摘要

This study empirically investigates whether CEOs adjust R&D investment levels around CEO turnover and finds evidence of increased R&D expenditure both in the early years of an incoming CEO's tenure as well as in the final years of an outgoing CEO's tenure, after controlling for other determinants of R&D investments. Further analysis indicates that the increased R&D expenditure in entry years is primarily associated with incoming CEOs who are promoted within the firm and therefore have considerable firm-specific knowledge and credible initial reputation. The increased R&D expenditure in exit years is primarily related to outgoing CEOs who assume other positions within the same firm after departing as CEOs.;Prior studies have predicted that departing CEOs will reduce investments in R&D in order to boost short-term profitability, and therefore bonuses, in their terminal years. Evidence in this study confirms the previously-documented result that compensation committees, anticipating such a reduction in investment, actively adjust CEO's compensation to induce more R&D investment in terminal years. This implicit adjustment in compensation structure provides one explanation for the increased R&D investment in exit years that this study documents. A second explanation is that the departing CEO's continued affiliation with the firm (after relinquishing his/her role as CEO) ameliorates the horizon problem and counteracts the departing CEO's incentive to make myopic investment decisions that boost short-term profitability at the expense of long-term performance.;An analysis of capital expenditure around CEO turnover reveals no evidence of abnormal patterns in investment on fixed assets. This result suggests that the increased R&D investment is mainly induced by CEO's personal discretion rather than by changes in the firm's investment opportunity set.;The final set of cross-sectional tests examines the impact of various corporate governance mechanisms on departing and incoming CEOs' ability to substantially alter R&D investment behavior in the final and initial years of their tenure, respectively. The results show that a more independent board and a separation of the role of CEO/Chairman mitigates abnormal R&D expenditures in exit years while higher equity ownership by executives and directors curbs abnormal R&D expenditures in entry years.