Harvest Now or Invest Further — The Dilemma Reexamined

Abstract

Firms regularly face a dilemma — whether to extract profits from the past investments or to invest further in value creation. Prior research calls this tradeoff strategic emphasis, and examines it by subtracting R&D expenses from advertising expenses. This investigation appears incomplete for three reasons. First, more than 75% of listed firms report no R&D and advertising expenses. Second, R&D expenses are often strategically underreported. And third, an increasing proportion of resources are invested on customer relations, human resource capabilities, and organizational capital. We address these limitations by more comprehensive identification of value appropriating and creating activities from SG&A expenses. We then propose a new measure of organizational emphasis to complement strategic emphasis. We find that unexpected shifts from value creation to value appropriation decreases a firm’s market value, contrary to prior research finding. Yet, firms are better off harvesting value in periods of unusually good performance. The stock market’s response to shifts in firm strategies differs based on the firm’s economic circumstance and investment opportunity set.

Keywords: Strategic emphasis, intangible investments, R&D, advertising, organizational capital, stock returns

JEL Classification: M31; M37; M41