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

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