Abstract
This study investigates whether the introduction of a short-term executive compensation plan is associated with a change in corporate decision-making. The results of this study provide evidence that the introduction of a short-term compensation scheme is associated with changes in the decisions of managers. Specifically, companies adopting bonus plans showed significant relative increases in capital expenditures. Testing for advertising and research and development gave results that were not significant. The study also found that the adoption of a short-term bonus plan is associated with a positive stock market reaction. The results provide some evidence that short-term bonus plans may be an effective mechanism to help better align managers' and stockholders' interests.
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