This study examines the effect of CEO competence and incentives on R&D spending. Much research in corporate governance and strategy has long examined the effects of CEO background and incentives separately, without explicitly recognizing the combined effect of these two determinants of innovation effort. This article combines behavioral research on stock options and the upper echelon perspective to predict R&D spending. The empirical analysis on a large sample of publicly traded firms provides consistent evidence that combining incentives with competence expands the understanding of the determinants of innovation effort in modern corporations.
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