This study investigates the potential impact of the measurement of fair-value employee stock bonuses (ESBs) after the ESB reduction from the implementation of the new regulations that mandated expensing employee bonuses (EBs). In addition, we examine the constraining effect of employee cash bonuses (ECBs) on R&D expenditures following the ESB reduction. By evaluating a sample of firms in Taiwan from 2002 to 2012, the empirical evidence shows that: (1) the potential impact of the measurement of fair-value ESB is positively related to ESB reduction around the time of the implementation of the mandated expensing EB regulations, and (2) following the ESB reduction, the propensity to replace ECB with ESB to save on cash is positively related to the incremental constraining effect of ECBs on R&D expenditures, in addition to ECBs, wages and employee stock options. Furthermore, the incremental constraining effect of ECBs on R&D expenditures was stronger for firms under higher cash constraints. Consistent with the free-cash-flow hypothesis, the R&D efficiency incrementally increased around the implementation period. These findings provide a different explanation of the traditional view of the role of share-based payments in encouraging R&D expenditures.
