Pay for accounting performance and R&D investment: Evidence from China

• DOI: 10.1016/j.iref.2016.04.004
• Publication Date: 2016-04-29T10:10:17Z
• Authors: Shenglan Chen; Bingxuan Lin; Rui Lu; Hui Ma
• Keywords: Pay for accounting performance; Agency; 330; Chinese market; 9. Industry and infrastructure; 0502 economics and business; 05 social sciences; 8. Economic growth; Innovation; 650; Compensation

Previous studies argue that due to the complexity and long-term nature of research and development (R&D), there is no significant relationship between pay for short-term accounting performance and R&D investment. Meanwhile, we might also expect a negative relationship between pay for accounting performance and R&D investment in firms under temporary earnings pressure. However, we show that in an emerging market such as China, where the agency cost of innovation is high, firms may use incentive plans based on accounting performance to mitigate the opportunistic behavior of management. We find a positive relationship between pay for accounting performance and R&D investment. In addition, we find that the above relationship becomes weaker if there are alternative governance mechanisms to mitigate the agency cost of innovation.