The Effect of Technology Spillovers on the Duration of Executive Compensation

 Assistant Professor at Department of Finance, University of Louisville.

We examine the effect of technology spillover on incentive contracting. We find that in the presence of greater technology spillovers, firms tend to grant longer duration compensation contracts to their executives. This finding is consistent with theoretical predictions by Manso (2011) who argue that firms should choose longer-term contracts to encourage managerial incentives for exploration rather than exploitation. We find this effect to be stronger among younger firms and firms with more growth opportunities. We also find that, in the presence of greater technology spillover, firms are more willing to grant shorter duration contracts when board and institutional monitoring is stronger. We enhance our identification by using exogenous variation in state-level R&D tax credits to identify the effect of technology spillovers. Overall, our findings suggest that technology spillover has a meaningful influence on compensation contracting.