Does Short-Termism Influence Firm Innovation? an Examination of S&P 500 Firms, 1990-2003

The relationship between firm performance and managerial behavior is one of considerable interest to strategy scholars, as is evident in the management literature. One particular research stream concerns performance outcomes arising from capabilities developed through investment in tangible and intangible assets (e.g., Dierckx and Cool, 1989). This relationship is intriguing from a practical standpoint because it can be fraught with tensions in managerial decision-making; on one hand, managers are driven to invest current resources in risky endeavors, such as advertising and capital expenditures, which may or may not yield expected outcomes in a near or distant future. On the other, they must conserve current resources in efforts to deliver short-term financial performance goals for stakeholders who measure the value of the firm (and managerial ability) by bottom-line results. The preceding conundrum has been coined "short-termism" (Laverty, 1996), "corporate myopia" (Feinberg, 1995), "business myopia" (Jacobs, 1991), and "managerial myopia" (Miller, 2002; Stein, 1989), with the underlying tension in decision-making implied that the need for managers to make investments necessary for building long-term competitive advantage often conflicts with the need for managers to meet short-term performance expectations of key external constituencies, particularly the capital markets. While the topic of short-termism has received significant attention within the popular and academic literature, the underlying dynamics of how external pressures drive managerial decisions have received less empirical and theoretical attention. Indeed, Laverty states that "Despite the duration and prominence of this debate, research conclusions that would guide managers are few and far between" (2004: 950). More recent observations on the relationship concur, with Marginson and McAulay observing that "Despite considerable debate, however, there is surprisingly little research that answers the questions raised by these arguments" (2008: 273). In general, the debate on how managers reconcile short-term results and long-term competitive advantage remains equivocal. This paper offers several contributions within the preceding debate by examining the influence of market valuations on a discretionary item that is central to a firm's long-term competitiveness, namely research and development (RD Ito and Pucik, 1993; Franko, 1989) as well as one that is, in turn, influenced by firm characteristics (e.g., Long and Ravenscraft, 1993; Hoskisson and Johnson, 1992; Hoskisson and Hitt, 1988). While few studies exist examining the relationship between the capital markets and innovation activities, this study differs from and extends those efforts in several ways. Past research has focused on the unidirectional effects of innovation activities on a firm's market valuation (e.g., Woolridge and Snow, 1990). As such, these studies have explicitly focused on the extent to which investors value managerial decisions geared towards creating long-term value. In contrast, this study examines the opposite relationship, specifically whether managers take into account or react to market valuation indicators in their decision-making. Furthermore, while limited efforts have confirmed a relationship between the capital markets and RD Bushee, 1998). This study complements these works by examining directly the extent to which firm market valuations impact a strategic tool discretionary to management, namely RD Grinyer et al. …