Make or buy new technology: The role of CEO compensation contract in a firm’s route to innovation

A firm’s board of directors, based on its risk tolerance or “appetite,” sets the corporate objectives. It is then the management’s job to meet the objectives by adopting appropriate strategies. However, the board can design compensation policies to encourage desired management strategy choices. This paper explores the extent to which management compensation policies are aligned with strategy choices for obtaining new technology. Firms obtain new technology either through internal R&D or through acquisitions, often labeled “make” and “buy” strategies, respectively. The “make” strategy is inherently more risky, with much of the high risk idiosyncratic. Furthermore, U.S. GAAP requires that R&D expenditures be expensed but allows capitalization of acquisition costs, thus a firm using the “make” as opposed to the “buy” strategy will experience a greater negative effect on accounting earnings. I hypothesize that these differences will lead risk-averse and utility-maximizing managers to implement the “buy” strategy if their compensation is heavily weighted on accounting-based performance measures. Conversely, managers with more stock-based compensation, especially stock options, are more likely to choose to develop new technology internally. Using data from U.S. high-tech industries and a simultaneous equations regression framework, I find evidence consistent with the above hypotheses.

The concept of risk society as a model for risk regulation – its hidden and not so hidden ambitions,side effects,and risks1

Beck’s risk society has become a highly influential theory in sociology and has begun to influence risk policy-making and regulation. The theory has been given too much credit, however. This article identifies and analyzes the troubling features of risk society, and demonstrates that it is a loose set of vague ideas, feelings, and hunches, rather than a theory. Risk society, as distinguished from modern industrial society, is a risk management society concerned with the identification and distribution of risks arising from industrial activities, while downplaying natural and other risks. Devoid of empirical content and analytical tools, it promotes a simplistic precautionary anti-industrial environmental and safety ethic. Risk society involves politicization of science and self-interested activism in risk management decision-making. Due to its unrealistic dogmas, ambitions, and side effects, risk society is unable to manage risks effectively and efficiently, and poses a threat to constitutional democracy. Policy-makers and risk managers, therefore, should not rely on risk society theory in designing and implementing risk management structures and regulations.