R&D volatility and market value: the role of executive overconfidence

Abstract

PurposeSignificant increase or decrease in research and development (R&D) expenditure may have an immense impact on market value. Based on the punctuated equilibrium theory, this paper aims to empirically analyze the impact of R&D volatilities on market value and the moderating effect of executive overconfidence.Design/methodology/approachThe study uses the panel data set that covers 902 Shanghai and Shenzhen A-share manufacturing listed firms and multiple regression method to test the theoretical hypotheses.FindingsThe results show that both positive and negative R&D volatilities have a robust and significant positive impact on the market value. Further analysis shows that the executive overconfidence positively moderates the relationship between R&D volatilities and market value.Research limitations/implicationsIn a rapidly changing and highly competitive environment, firms should recognize that the balance of innovation strategies will help to bring higher market value. Furthermore, firms could improve corporate governance to make the best of managerial characteristics, such as overconfidence, on the innovation decision-making process.Originality/valueBy pushing the static perspective to a dynamic perspective and empirically documenting the role of executive overconfidence, this study contributes to the literature on the relationship between R&D expenditure and market value, generating theoretical and practical insights for firms to improve innovation governance and innovation strategies to achieve better business performance.