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.
All Science Journal Classification (ASJC) codes
- Business, Management and Accounting(all)