R&D Manipulation Around SEOs and SEO Valuations

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Author
Walker, Rosemary
Kwak, Sungkyu
Hull, Robert M.
Publisher
Washburn University. School of Business
Sponsor
Kaw Valley Bank
Issue Date
June 2015
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Abstract
Prior research finds T&D reductions around SEOs are linked to insider ownership decreases. This suggests that insiders underinvest in R&D to inflate earnings so as to increase SEO value. We construct a variable that measures R&D underinvestment, and use this variable within a regression methodology to test its effect on SEO valuation. We discover greater R&D underinvestment is associated with lower valuation even before the announcement of an SEO, frustrating insiders' efforts to increase SEO value by reducing R&D. We also find that lower valuation of SEO firms due to R&D underinvestment continues up to two years after SEOs.
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