Managerial Overconfidence and Cost Behavior of R&D Expenditures

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.

Managerial Overconfidence, Corporate Social Responsibility Activities, and Financial Constraints

“…The results imply that as CSR activities increase, long-term performance decreases. However, when we introduce an interaction term, CSR × OC, which combines the CSR dummy (if CSR > 0, then CSR_D = 1, otherwise 0) with OC ranks (1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)(13)(14)(15)(16)(17)(18)(19)(20) as in models 3 and 4, the results are totally different. The relationship between CSR and AAR turns to positive and significant (p-value < 5%) in model 3.…”

“…Therefore, if firms face financial constraints with regard to engaging in CSR activities, rigorous CSR activities could be harmful to their long-term performance. We examine the long-term performance of CSR activities initiated by overconfident CEOs, considering financial constraints.Prior research on the impact of a CEO's emotional bias (optimism, loss aversion, overconfidence) and other self-serving bias on corporate strategic decisions included financing decision [16], investments [17], dividend payment [18], cost behavior, and R&D expenditure [19]. This paper tries to examine the impact of CEOs' overconfidence level on CSR activities for the first time.…”

“…Prior research on the impact of a CEO's emotional bias (optimism, loss aversion, overconfidence) and other self-serving bias on corporate strategic decisions included financing decision [16], investments [17], dividend payment [18], cost behavior, and R&D expenditure [19]. This paper tries to examine the impact of CEOs' overconfidence level on CSR activities for the first time.…”

Can the Famous University Experience of Top Managers Improve Corporate Performance? Evidence from China

“…Overconfidence is one of the key manifestations to show the irrationality of corporate executives, which refers to the psychological deviation that people tend to overestimate their success probability and underestimate their failure probability [65,66]. Studies have shown that overconfidence varies among individuals of different gender, age and educational background.…”

Business Strategy, State-Owned Equity and Cost Stickiness: Evidence from Chinese Firms

“…However, recent empirical research demonstrates asymmetry in cost behavior -in other words, that costs increase more rapidly with activities than they decrease -which has been termed "cost stickiness" [3]. Recent studies have examined asymmetric cost behavior as a function of managerial deliberate cost adjustment [3][4][5], managerial optimism or pessimism [6], earnings management incentives [7,8], agency problem [9], earnings forecasts [10], capacity utilization [11], unemployment [12], product market competition [13], corporate social responsibility [14], conservatism [15], and whether or not the costs are related to the core operations of a firm [16].…”