Abstract
This study examines the impact of a CEO’s confidence level on decisions regarding research and development (R&D) expenditures. R&D is an important part of a company’s strategy for achieving long-term sustainable growth. However, due to its discretionary nature, some CEOs choose to reduce R&D costs to enhance short-term performance. In other words, R&D cost behavior may vary depending on CEO characteristics. This study examines whether, in an effort to improve their firm’s future performance, CEOs who are highly overconfident tend not to actively decrease R&D expenditures even when sales decrease. We posit that CEO overconfidence affects the cost behavior of R&D spending that is not related to their personal privileges. A cost behavior model was utilized to verify the relationship between CEOs’ propensity for overconfidence and R&D expenditures. Our findings show that highly overconfident CEOs tend not to take actions to reduce R&D costs even if sales decrease because CEO overconfidence tends to be positively related to R&D. Since R&D represents both costs and long-term investments, policy support for capitalizing R&D costs can be considered as enhancing the sustainability of businesses.
Highlights
Due to its discretionary nature, research and development (R&D) spending is often used by CEOs for earnings management, which suggests that the cost behavior of R&D expenditures is related to the CEO’s inclinations and the company’s characteristics [1,2,3]
The results of the analysis indicate that due to its discretionary nature, R&D spending is often used by CEOs for earnings management
While R&D spending is symmetric to sales increases and decreases compared to the asymmetric cost behavior of SG&A expenses, the results may differ depending on the control environment
Summary
Due to its discretionary nature, research and development (R&D) spending is often used by CEOs for earnings management, which suggests that the cost behavior of R&D expenditures is related to the CEO’s inclinations and the company’s characteristics [1,2,3]. This study examines the impact of a CEO’s confidence level on decisions regarding R&D expenditures It uses Andersen et al.’s [4] cost behavior model to verify whether CEOs with high overconfidence tend not to actively reduce R&D costs even if sales decrease. Asymmetric cost behavior reflects the positive actions taken by CEOs to reduce the adjustment costs that will be incurred in the future It can be explained from the negative aspect of a CEO’s reluctance to reduce the cost of maintaining his/her private benefits and privileges. That is, based on CEO overconfidence, it is necessary to examine R&D cost behavior since R&D is a positive factor that can lead to the creation of future performance, unlike expenses incurred to maintain the CEOs’ own personal benefits and privileges. This study focuses on R&D expenditures, and analyzes the relationship between CEO overconfidence and cost behavior
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