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The Shielding of CEO Compensation from the Effects of Strategic Expenditures*

Augustine Duru¹; Raghavan J. Iyengar²; ALEX THEVARANJAN³

¹ American University · ² North Carolina Central University · ³ Syracuse University

Abstract This study investigates whether and why compensation committees shield CEO compensation from income‐decreasing effects of strategic expenditures. We document that firms do shield recurring strategic expenditures such as research and development and advertising expenditures. We also find that firms shield research and development expenditures more than advertising expenditures. Our results are consistent with prior findings that suggest that compensation committees shield CEOs from nonroutine transactions such as restructuring charges and extraordinary losses. Using a two‐task principal‐agent framework, we show that such shielding improves the efficiency of the contract by making the shielded income measure more congruent with the principal's objectives.

DOI

10.1506/um8q-nvj6-jkgt-gh5w

Volume

19 (2)

Pages

175-193

Language

en

Export

BibTeX

Sources

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