Behavioral Explanation of Management Decision Making in Intangible Asset Investments: Compensation Hypothesis Test by Laboratory Approach

Choosing between accounting treatments for intangible assets, which include expensing or capitalizing all expenditures, is influenced by factors such as the relationship between decision making and compensation scheme. This paper examines influential factors for decision making of management regarding intangible asset investments emphasizing compensation hypothesis. Laboratory experiment is applied to specify the relationship between compensation and management decision making regarding intangible assets. Our population consists of senior managers, board of directors (public and private company) and skilled academics and our examinees equal to 195 people. Our findings show that management decision making is influenced by accounting treatments and managers prefer purchasing method to developing method and developing with extra disclosures method which can be explained by certainty effect theory. Moreover, our study shows that management decision making is not influenced by compensations and synergies between accounting treatments and compensation scheme. Purchasing method preference which leads to expenditure capitalization among other methods means that either manager’s compensation has not been affected by bottom line, in other words social space might not let manger to use part of incentive compensation, or manager prefers future benefits to the current benefit.