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When capital markets discount R&D expenditures: the problemistic search effect

When capital markets discount R&D expenditures: the problemistic search effect Research finds that investors initially under-react to increases in R&D intensity. The phenomenon is commonly viewed as mispricing. We draw on behavioral theory of the firm (BTF) to propose an alternative explanation that increased R&D intensity is often indicative of problemistic search in firms. We empirically explore three contextual factors that may help discriminate between mispricing and problemistic search effects when capital markets frown on increased R&D intensity.Design/methodology/approachWe use econometric methods to analyze longitudinal data on 4,561 US manufacturing firms.FindingsWe find that market reactions to R&D investments are consistent with the view that managers often engage in R&D-based search to correct anticipated problems. We show that increased R&D intensity is a stronger indicator of diminished expected future performance for firms with greater inertia, including larger firms and high-performing firms. However, greater R&D intensity is less indicative of problemistic search in slack-rich firms.Originality/valueWhilst the BTF has been used extensively in management research, ours is one of the few studies which link the BTF to stock market phenomena. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Strategy and Management Emerald Publishing

When capital markets discount R&D expenditures: the problemistic search effect

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1755-425X
DOI
10.1108/jsma-10-2020-0288
Publisher site
See Article on Publisher Site

Abstract

Research finds that investors initially under-react to increases in R&D intensity. The phenomenon is commonly viewed as mispricing. We draw on behavioral theory of the firm (BTF) to propose an alternative explanation that increased R&D intensity is often indicative of problemistic search in firms. We empirically explore three contextual factors that may help discriminate between mispricing and problemistic search effects when capital markets frown on increased R&D intensity.Design/methodology/approachWe use econometric methods to analyze longitudinal data on 4,561 US manufacturing firms.FindingsWe find that market reactions to R&D investments are consistent with the view that managers often engage in R&D-based search to correct anticipated problems. We show that increased R&D intensity is a stronger indicator of diminished expected future performance for firms with greater inertia, including larger firms and high-performing firms. However, greater R&D intensity is less indicative of problemistic search in slack-rich firms.Originality/valueWhilst the BTF has been used extensively in management research, ours is one of the few studies which link the BTF to stock market phenomena.

Journal

Journal of Strategy and ManagementEmerald Publishing

Published: Oct 20, 2021

Keywords: Behavioral theory of the firm; BTF; Firm search behavior; R&D intensity

References