Title: R&D expenditure, financing policy, and default risk

Authors: Yi-Mien Lin; Shieh-Liang Chen; Chin-Fang Chao

Addresses: Department of Accounting, National Chung Hsing University, Taiwan ' Department of Business Administration, Asia University, Taiwan ' Department of Finance, Ling Tung University, Taiwan. No.190, Wenxin 1st Rd., Xitun Dist., Taichung City 407, Taiwan

Abstract: This paper finds that after controlling for board composition, firms with larger cash constraints tend to grant stock options to managers as performance rewards. The interaction item between cash constraint shortfall and past stock returns performance is positively related to stock option grant. The findings also show that firms tend to raise funds using long-term bank loans or bonds when the managers own higher holdings of stock options, but the financing policy of long-term debts is unrelated to the growth opportunity of a firm. By using initial default risk increase as a proxy for the wealth transfers from debt-holders to shareholders, we find that the long-term debts are negatively related to the change in initial default risk. For a firm with higher financial constraints, the current R&D expenditure is positively related to initial default risk increase. Moreover, the holdings of stock options of managers are negatively related to earnings management. The interaction term between the holding of stock options and R&D expenditures is positively related to earnings management. It means that for firms of high spending on R&D, managers with larger stock options holdings more concern about their investment's interests, and therefore managers have higher incentives to perform earnings management.

Keywords: R&D expenditure; research and development; executive stock options; earnings management; long-term debts; default risk; financing policy; board composition; performance rewards; incentives.

DOI: 10.1504/IJEA.2015.068982

International Journal of Economics and Accounting, 2015 Vol.6 No.1, pp.81 - 104

Received: 08 May 2021
Accepted: 12 May 2021

Published online: 23 Apr 2015 *

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