THE IMPACT OF MYOPIC R&D INVESTMENT DECISIONS ON EARNINGS GROWTH

Abstract

This paper empirically examines the association between myopic R&D investment decisions and earnings growth. The results indicate that firms are significantly more likely to experience a decline in their future earnings growth when they reduce R&D spending for myopic purposes. The impact of non-myopic cuts, while still negative, is less strong than that of myopic cuts. This study also finds that the negative impact due to myopic cuts can be reduced by a subsequent abnormal increase in R&D spending. In addition, the more frequently a firm myopically reduced R&D investments in the past, the more likely it will experience a slowdown in its future earnings growth. These results contribute to the limited literature on the consequences of R&D real management by addressing the negative impact of myopic R&D cuts explicitly after considering the impacts of past and subsequent R&D investment decisions.