The Effect of Earnings’Underperformance and CEO Incentive Factors on R&D Investment: Evidence from U.S. Manufacturing Firms

This study provides empirical evidence on how underperformance relative to analyst expectations influences firm-level R&D investment. We argue that R&D, as a critical long-term resource, is particularly vulnerable to short-term performance pressures, and thus underperformance is an important factor shaping firms’ investment behavior. Building on incentive alignment and managerial myopia perspectives, we highlight the moderating role of CEO characteristics—career horizon and pay-for-performance—in shaping how external performance pressures affect R&D investment. Using a panel of U.S. manufacturing firms from 1992 to 2015, we find that underperformance relative to analysts’ forecasts leads to a significant reduction in R&D spending. Moreover, CEOs with shorter career horizons amplify this negative relationship, while CEOs with stronger pay-for-performance incentives mitigate it. These findings underscore the importance of CEO incentive structures in preserving long-term shareholder value by countering short-termism. Our results extend the literature by offering theoretical and empirical insights into how executive incentive factors can either exacerbate or alleviate the adverse effect of performance pressures on strategic investments. By unpacking the interplay between external market pressures and internal governance mechanisms, this study provides a more nuanced understanding of firm innovation strategies. The findings also offer practical implications for boards and policymakers seeking to design incentive systems that safeguard long-term innovation.