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Examines the connection between earnings expectations and R&D expenditures, suggesting management decisions may hinder innovation.
This study examines the relationship between expenditures for research and development (R&D) and earnings expectations. We examine changes in research and development expenditures when earnings vary from analysts' predictions and find evidence of a direct relation between the variables. Moreover, after controlling for financial conditions and investment opportunities, we find the relationship between unexpected R&D spending and unexpected earnings appears to be approximately linear over unexpected earnings values. To the extent that managers focus on short-run earnings, R&D spending may be negatively impacted when earnings fall short of analysts' expectations.
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Perry et al. (1994) studied this question.
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