Seasoned Equity Issuers’ R&D Investments: Signaling or Over-Optimism

Managerial Over‐Optimism and Research and Development Investment: Evidence from Korean Initial Public Offering Firms*

“…Discretionary R&D expenditures in IPO years. We estimate over-investment in R&D using a predictive model for discretionary R&D expenditures in an IPO year (Darrough and Rangan, 2005;Qian et al, 2012). This method is similar to a widely used method in the accounting literature for measuring discretionary accruals.…”

“…Conversely, other studies argue that an increase in discretionary accruals may reduce future stock returns, as discretionary accruals are seen as resulting from opportunistic managerial behavior (Dechow and Sloan, 1995;Francis et al, 2005). Similarly, Qian et al (2012) expect stock returns to improve after a capital increase is disclosed if higher discretionary R&D expenditures before the capital increase act as a market signal but not if they result from optimistic over-investing. They find evidence for the signaling effect and the managerial optimism hypothesis among high-tech and low-tech companies, respectively.…”

“…Recently, Kim and Kim (2020) document that the level of CEO optimism and the costs of bank loans have a convex relation. Qian et al (2012) investigate the effects of discretionary R&D expenditures immediately before capital increases on stock returns when the capital increases are disclosed based on the assumption that investors react negatively to such disclosures. Accounting studies analyzing the association between discretionary accruals and future stock returns can explain the relationship between discretionary R&D expenditures and future stock returns.…”

“…We aim to empirically examine whether successful IPO firms over-invest in R&D owing to over-optimism. Qian and Zhong (2012) argue that over-investment in R&D immediately before seasoned equity offerings (SEOs) may be intended to signal a firm's prospects or may result from over-optimism. They report that, on one hand, a high-tech firm's R&D investments exceeding market expectations immediately before an SEO may serve as a signal, thereby mitigating any negative stock price response when the capital increase is announced.…”

Working hard for long‐distance relationships: Geographic proximity and relationship‐specific investments

“…On the other hand, RSI can serve as a commitment device (Brander & Spencer, 1983;Qian et al, 2012). To the extent that geographic distance increases the costs associated with information acquisition (Giroud, 2013), which in turn may impede a customer's ability to provide timely feedback to the supplier or to monitor the supplier's actions, the supplier in a long-distance relationship runs a higher risk of being replaced by its principal customer.…”