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- Title
Do Capital Markets Punish Managerial Myopia? Evidence from Myopic Research and Development Cuts.
- Authors
Tong, Jamie Y.; Zhang, Feida
- Abstract
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.
- Subjects
CAPITAL market; EARNINGS management; DECISION making in business; INVESTMENTS; RESEARCH &; development; EXECUTIVE compensation
- Publication
Journal of Financial & Quantitative Analysis, 2024, Vol 59, Issue 2, p596
- ISSN
0022-1090
- Publication type
Article
- DOI
10.1017/S0022109023001205