| Prior literature argues that compensation based on short-term earnings induces CEOs near retirement to forego projects with positive net present value. However, empirical research on whether CEOs curtail investment in long-term projects such as R&D during their final years provides mixed evidence. This paper performs direct and powerful tests of the relationship between earnings-based compensation and abnormal R&D spending in CEOs' final years. Examining a "short-horizon" sample of 203 retiring CEOs, I find that R&D spending in CEOs' pre-retirement years is neither statistically nor economically different from R&D spending by those firms during other years. In addition, I find no evidence that abnormal R&D spending in CEOs' pre-retirement years is associated with whether CEOs' retirement benefits are contingent on bonuses received in CEOs' final years. These results hold after controlling for other factors expected to affect the horizon problem, such as the relay process of CEO succession, CEO post-retirement board service, and CEO equity holdings. Finally, I provide evidence that opportunistic R&D curtailment among short-horizon CEOs documented by prior literature is likely overstated. |
