Management motivation, borrowing cost capitalization and long-term construction projects

Abstract

This study examines empirically the associations among discretionary application of accounting policy, management compensation and the qualifying asset investment decisions of the firm. Compared to firms of similar size in the same industry, top managers in firms investing in qualifying assets and capitalizing borrowing cost receive significantly higher compensation, and further undertake more long-term construction projects. This amounts to excess compensation above the expected industry-year average compensation level. Capitalization of borrowing cost removes the disincentive of reduced earnings due to higher interest on borrowing and related expenses, and excess compensation rewards managers for their additional efforts involved in long-term construction projects. The results of our matched-pair treatment-control analysis and comparison of actual with expected compensation suggest that capitalizing borrowing cost exerts a favorable effect on the motivation of managers in undertaking long-term construction projects and higher compensation add on to the motivational effect. © 2012 Springer-Verlag.