Do Capital Markets Punish Managerial Myopia? Evidence from Myopic R&D Cuts

49 Pages Posted: 14 Feb 2014 Last revised: 3 Apr 2021

See all articles by Jamie Tong

Jamie Tong

The University of Queensland

Feida Zhang

University of Queensland - Accounting and Accountability

Date Written: February 14, 2014

Abstract

The extant literature provides conflicting arguments and mixed results on whether capital markets punish managerial myopia. Using managers’ cutting R&D 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. Overall, the results support that security markets are not shortsighted. In a further analysis, we document that compensation, especially earnings-based compensation, could be among the reasons why managers behave myopically.

Keywords: Managerial Myopia; Capital Market; R&D; Investor Sophistication; CEO Compensation

JEL Classification: G14; G32; M41

Suggested Citation

Tong, Jamie Yixing and Zhang, Feida, Do Capital Markets Punish Managerial Myopia? Evidence from Myopic R&D Cuts (February 14, 2014). Tong Jamie and Frank Zhang. 2021. "Do Capital Markets Punish Managerial Myopia? Evidence from Myopic R&D Cuts" . Forthcoming at Journal of Financial and Quantitative Analysis. , Available at SSRN: https://ssrn.com/abstract=2395774 or http://dx.doi.org/10.2139/ssrn.2395774

Jamie Yixing Tong

The University of Queensland ( email )

Brisbane, Queensland 4072
Australia

Feida Zhang (Contact Author)

University of Queensland - Accounting and Accountability ( email )

St Lucia
Brisbane, Queensland 4072
Australia

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