R&D Expenditure Volatility and Firm Performance: Firm and Industry Contexts

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Description: "There are conflicting views regarding the value of proactive management of the firm's R&D budget. Some observers argue that frequent and substantial changes in the firm's R&D spending may be evidence of myopic earnings management, disrupting the firm's innovation process and hurting firm performance. Others find that agency problems exist in the R&D investment decision process; thus stable R&D investments over time may be evidence of overinvestment in underperforming R&D projects. We find that R&D expenditure volatility is positively related to firm performance, suggesting that proactive R&D management enhances firm performance. Further, several firm-level and industry-level contexts help to explain the nature of this relationship. Empirical analysis yields strong support for the proposition that high levels of organizational slack, low levels of leverage, low levels of diversification and operating in munificent industries strengthen the positive link between R&D expenditure volatility and firm shareholder value. This study provides important insights into the role that firm structure and industry context plays in the innovation process."

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