A Study on the Impact of Investor Sentiment on the Relationship between R&D Investment and Future Firm Performance

[Purpose]The purpose of this study is to empirically verify whether the relationship between R&D expenditures and future performance varies based on the type of investor sentiment formed around individual companies at the time of R&D expenditure. [Methodology]The study analyzes whether the relationship between R&D expenditure and future performance differs depending on the investor sentiment formed around individual firms at the time of the R&D investment. Investor sentiment at the individual firm level is defined using the methodology proposed by Ryu et al. (2018), and future firm performance is measured by both accounting－based metrics (ROA) and market－based metrics (Tobin’s Q). Specifically, an interaction term between R&D investment and investor sentiment is used to empirically analyze the effect of investor sentiment on the relationship between these two variables (i.e., R&D investments and future firm performance). [Findings]First, optimistic investor sentiment leads to increased R&D expenditure by firms. Second, when investor sentiment is optimistic, the increased R&D expenditure negatively impacts future accounting performance and market value. Third, we confirmed that these results are consistently supported by Heckman’s two－stage analysis, which controls for the effects of latent endogenous variables. Collectively, these findings indicate that while optimistic (pessimistic) investor sentiment increases (decreases) R&D investments, these investments have a negative relationship with future firm performance. These results imply that R&D investments driven by investor sentiment may be suboptimal decisions carried out from a catering perspective rather than optimal investment decisions. [Implications]This study expands the field of behavioral finance by exploring the influence of investor sentiment on corporate decision－making. Practically, it suggests that during periods of optimistic investor sentiment, investors should carefully analyze the information provided by firms. Additionally, firms should be cautious not to make suboptimal decisions influenced by favorable market conditions.