Myopic Firms

52 Pages Posted: 21 Nov 2013 Last revised: 13 Jul 2020

Date Written: April 20, 2020

Abstract

This paper documents that underpriced firms substitute R&D spending with share buybacks to the detriment of innovation. To identify underpriced firms, I introduce a novel measure of non-fundamental price pressure induced by indirect exposure to industry-level shocks. This measure addresses potential shortcomings of common proxies of underpricing based on flow-induced fire sales. The documented negative impact on R&D is stronger for financially constrained firms that are held by impatient investors, and for high-disagreement stocks. The results are consistent with a model in which managers under-invest in innovation to boost short-term profits, as the market is inefficiently slow in valuing research.

Keywords: innovation, research, underpricing, share repurchases, mutual funds, firm policies, impatience

JEL Classification: G12, G31, G35, O31

Suggested Citation

Parise, Gianpaolo, Myopic Firms (April 20, 2020). Swiss Finance Institute Research Paper No. 14-12, Available at SSRN: https://ssrn.com/abstract=2357615 or http://dx.doi.org/10.2139/ssrn.2357615

Gianpaolo Parise (Contact Author)

EDHEC Business School and CEPR ( email )

393 Promenade des Anglais
Nice, 06200
France

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