R&D Expenditure as a Response to Peer Influence

51 Pages Posted: 2 Jul 2019

See all articles by Dien Giau Bui

Dien Giau Bui

National Taiwan University, Department of Finance, Students

Yehning Chen

National Taiwan University

Chih-Yung Lin

National Chiao-Tung University

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Date Written: July 1, 2019

Abstract

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

Suggested Citation

Bui, Dien Giau and Chen, Yehning and Lin, Chih-Yung and Lin, Tse-Chun, R&D Expenditure as a Response to Peer Influence (July 1, 2019). Available at SSRN: https://ssrn.com/abstract=3412770 or http://dx.doi.org/10.2139/ssrn.3412770

Dien Giau Bui

National Taiwan University, Department of Finance, Students ( email )

1, Sec. 4, Roosevelt Road
Taipei
Taiwan

Yehning Chen

National Taiwan University ( email )

1 Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

Chih-Yung Lin

National Chiao-Tung University ( email )

Taiwan

Tse-Chun Lin (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

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