Make or Buy New Technology – a CEO Compensation Contract’s Role in a Firm’s Route to Innovation
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4436-03.pdf
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189.49 KB
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7e2147d8b47af41195c890098b9d6ee0
Author(s)
Xue, Yanfeng
Date Issued
February 13, 2004
Series/Report no.
MIT Sloan School of Management Working Paper;4436-03
Abstract
Firms obtain new technology either through internal R&D or through acquisitions. These two approaches are usually labeled as "make" and "buy" strategies. In this paper, I examine the relation between a firm's choice of "make" or "buy" and the performance measures used in the firm's CEO compensation contract. I focus on the two major differences between "make" and "buy" strategies: the risk levels and accounting treatments. I then examine the differential implications of accounting-based and stock-based performance measures on managers' incentive in choosing between the two strategies. Using data from US high tech industries, I find that, firms relying on "buy" approach to obtain technology tend to depend more on the accounting-based performance measures, while those firms who innovate through R&D activities skew toward stock-based pay especially stock options
Subjects
R&D
Acquisition
Compensation
Technology
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