The Stock Market in the Driver's Seat! Implications for R&D and Marketing

The Stock Market in the Driver's Seat! Implications for R&D and Marketing

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Article ID: iaor20119626
Volume: 57
Issue: 9
Start Page Number: 1594
End Page Number: 1609
Publication Date: Sep 2011
Journal: Management Science
Authors: ,
Keywords: financial, investment
Abstract:

The budgets for research and development (R&D) and marketing should be determined by managers to attain product market advantages. However, in response to investor expectations for short‐term stock returns, managers may modify these budgets myopically to avoid unexpected short‐term earnings shortfalls, at the cost of long‐term profitability. We propose that the past behavior of firm stock returns and volatility may create investor expectations of short‐term financial performance, which drives managers to modify either R&D or marketing budgets or both. In the context of high‐technology firms, a Bayesian vector autoregression model, supported by content analysis, shows that few firms exhibit high levels of managerial myopia by simultaneously cutting both R&D and marketing budgets; instead, firms display moderate myopic reactions, in the form of unanticipated decreases in R&D budgets but increased budgets for marketing functions. The tendency to manage myopically in response to past stock returns and volatility increases as firm size or industry concentration decrease.

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