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Do Capital Markets Punish Managerial Myopia? Evidence from Myopic Research and Development Cuts

Published online by Cambridge University Press:  06 December 2023

Jamie Y. Tong  and
Feida (Frank) Zhang Open the ORCID record for Feida (Frank) Zhang [Opens in a new window]
Jamie Y. Tong
Affiliation:
Shanghai University SHU-UTS SILC Business School yixingtong@shu.edu.cn
Feida (Frank) Zhang*
Affiliation:
China Europe International Business School
*
feidazhang@ceibs.edu (corresponding author)
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Abstract

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The literature provides conflicting arguments and mixed results regarding whether capital markets punish managerial myopia. Using managers cutting research and development (R&D) investments to meet short-term earnings goals as a research setting, this study reveals that capital markets penalize managerial myopia, especially for firms with high investor sophistication. Moreover, the negative market reactions to managerial myopia are weaker for firms with overinvestment problems than for those without such problems. Overall, the results support the notion that security markets are not shortsighted. In further analysis, we document that compensation, especially earnings-based compensation, may cause managers to behave myopically. Our study contributes to the literature, reconciling previously mixed findings by capturing managers’ myopic behavior in a more targeted way and showing that markets punish myopic R&D cutting.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 2 , March 2024 , pp. 596 - 625
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank the anonymous referees, Adrian Cheung, Ian Gow, Jarrad Harford (the editor), Jiekun Huang, Nianhang Xu, Bohui Zhang, Weining Zhang, and the seminar participants at Sun Yat-sen University, Tsinghua University, Renmin University, Curtin University, and the 2016 JIAR Conference for their helpful comments. Jamie Tong acknowledges financial support from the National Natural Science Foundation of China (Project Nos. 71790602, 71790603, and 71862017). Feida Zhang acknowledges financial support from the MOE (Ministry of Education in China) Project of Humanities and Social Sciences (Grant Nos. 20JZD014 and 17YJA790012) and CEIBS.

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