Do managers play games with R&D?

What an interesting paper!

As most anyone in industry will tell you, managers often play games with R&D spending. Whether it is for their own "pet projects" or to further some cause within the firm. Of course, this should not be surprising as no where are information assymetry probelms more severe than in R&D spending.

Bange, De Bondt, and Shrider now provide empirical evidence of this game playing with respect to managers trying to "manage" earnings. This is because R&D expenditures (for which there is much discretion as to the timing) lower earnings.

The authors find

"find ample evidence suggesting that executives, on average, distort R&D investment decisions so that they may improve their chances of meeting analyst expectations."

This finding, which is based on firms with large R&D spending over the past two plus decades, is consistent with previous survey based work (for instance Graham, Harvey and Rajgopal’s (2004)).

VERY interesting and important work.

Cite:
Bange, Mary M, Werner F.M. De Bondt, and David G. Shrider, FMA Working paper, 2005.