R%D expenditure, financing policy, and default risk

This paper finds that after controlling for board composition, firms with larger cash constraints tend to grant stock options to managers as performance rewards. The interaction item between cash constraint shortfall and past stock returns performance is positively related to stock option grant. The findings also show that firms tend to raise funds using long-term bank loans or bonds when the managers own higher holdings of stock options, but the financing policy of long-term debts is unrelated to the growth opportunity of a firm. By using initial default risk increase as a proxy for the wealth transfers from debt-holders to shareholders, we find that the long-term debts are negatively related to the change in initial default risk. For a firm with higher financial constraints, the current R%D expenditure is positively related to initial default risk increase. Moreover, the holdings of stock options of managers are negatively related to earnings management. The interaction term between the holding of stock options and R%D expenditures is positively related to earnings management. It means that for firms of high spending on R%D, managers with larger stock options holdings more concern about their investment's interests, and therefore managers have higher incentives to perform earnings management.