Does Government Spending Crowd Out R&D Investment? Evidence from Government-Dependent Firms and Their Peers

89 Pages Posted: 21 Mar 2015

See all articles by Phong T. H. Ngo

Phong T. H. Ngo

Australian National University (ANU)

Jared R. Stanfield

University of Oklahoma; Financial Research Network (FIRN)

Date Written: August 23, 2019

Abstract

We provide evidence that managerial incentives to manipulate real activities can influence the effectiveness of fiscal policy. Increases in federal spending lead government-dependent firms to expand R&D investment whereas industry-peer firms contract. The net result is a reduction in industry-level R&D investment. We find evidence of a novel mechanism for the crowding out of peer-firm investment: peer-firm managers respond to falling relative performance by cutting R&D to manage current earnings upward. We show that these differential responses manifest in firm value. These findings are robust to endogeneity and selection concerns as well as a battery of alternative explanations.

Keywords: federal budget, government-dependent firms, peer-firms, R&D, crowding out

JEL Classification: G31, G32, G38, H32, M41, P16

Suggested Citation

Ngo, Phong T. H. and Stanfield, Jared R., Does Government Spending Crowd Out R&D Investment? Evidence from Government-Dependent Firms and Their Peers (August 23, 2019). Melbourne Business School, 2016 Financial Institutions, Regulation & Corporate Governance (FIRCG) Conference; FIRN Research Paper No. 2581273. Available at SSRN: https://ssrn.com/abstract=2581273 or http://dx.doi.org/10.2139/ssrn.2581273

Phong T. H. Ngo (Contact Author)

Australian National University (ANU) ( email )

RSFAS, College of Business and Economics
Australian National University
Canberra, Australian Capital Territory 0200
Australia
+61 2 6125 1079 (Phone)

HOME PAGE: http://cbe.anu.edu.au/people/rsfas/phong-ngo/

Jared R. Stanfield

University of Oklahoma ( email )

Norman, OK 73019
United States

HOME PAGE: http://jaredstanfield.com

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Register to save articles to
your library

Register

Paper statistics

Downloads
241
Abstract Views
1,246
PlumX Metrics