R&D Expenditure as a Response to Peer Influence
51 Pages Posted: 2 Jul 2019
Date Written: July 1, 2019
This paper examines the response of a focal firm to peer R&D spending. We find that a one-standard-deviation increase in peer R&D investment is associated with approximately a 13.7 percent increase in a firm’s R&D. Using trade secret legal protection among peers as the instrumental variable yields similar results. This peer effect on R&D spending is more prominent for firms with tighter financial constraints, overconfident or highly incentivized CEOs, higher growth opportunity, and in more competitive or innovative industries. We also find that managerial learning and relative-wealth concerns seem to be the dominating economic mechanisms for the peer effect. Finally, firms with more peer R&D spending have higher subsequent innovation output and firm value. However, this bright side of the peer effect comes with both higher stock-return volatility and stock-price crash risk.
Keywords: peer effect; R&D; trade secret legal protection; managerial learning; relative wealth concerns
JEL Classification: G31, G32, G34, G41
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