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Equity Incentives and Long-term Value Created by SG&A Expenditure
Rajiv Banker, Temple University
Rong Huang, City University of New York - Baruch College
Ram Natarajan, The University of Texas at Dallas
ABSTRACT. In this paper we investigate how incentives affect managers’ expenditure decisions and how firms make equity grant decisions considering managerial behavior. Focusing on SG&A spending, we first document that SG&A expenditure creates future value that varies across firms and industries. We hypothesize and find that new grants of equity incentives lead to an increase in SG&A expenditure in companies where SG&A creates a high future value. We also find that firms with high level of SG&A spending grant more new equity incentives when SG&A creates more future value. The evidence is consistent both with managers making rational investment decisions in response to new grants of equity incentives and with firms making efficient grant decisions based on managers’ expected behavior. Overall, this study documents the importance of considering the future value created by SG&A expenditure in examining the association between equity incentives and managerial spending behavior.
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