The Effect of Business Strategy and Life Cycle on Myopic R&D Investment

Chih-Hsien Liao, Jenten Liu and Yi-Pong Chia

This study examines whether a firm’s business strategy and life cycle will influence managers’ myopic behaviour in R&D investment. Using a sample of listed Taiwanese firms who have high incentives to meet earnings benchmarks from 1996 to 2010, we find that firms adopting the prospector strategy are more likely to cut R&D expenditures. In addition, we find that firms in the growth stage exhibit lower likelihood of cutting R&D expenditures to meet earnings targets. These results suggest that prospector firms are concerned more about the cost of investor undervaluation due to R&D expensing than about the future benefits that could be derived from current R&D spending. Further analysis indicates that such myopic behaviour tends to exist in firms with poor governance.

JEL Codes: M41

DOI : http://dx.doi.org/10.21102/graf.2014.03.51.07