Does short-termism influence firm innovation? An examination of S&P 500 firms, 1990-2003

This study engages the short-termism debate by examining the effect of the capital markets on firms' R&D investment behavior. While R&D spending potentially offers the means for firms to establish long-term competitive advantage, its related uncertainty can impel managers to curb its funding in efforts to meet short-term performance goals for shareholders. To understand this dynamic, this study draws upon two theoretical perspectives - threat rigidity and prospect theory - to develop and empirically test competing hypotheses regarding the extent to which managers adjust R&D investments in response to changes in their firm's market valuation. The results suggest that changes in market valuations are positively associated with changes in R&D levels, thus supporting the notion of short-termism. Theoretical, managerial, and policy implications of these findings are discussed.