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Does Government Spending Crowd Out R&D Investment? Evidence from Government-Dependent Firms and Their Peers

Published online by Cambridge University Press:  14 December 2020

Phong T. H. Ngo  and
Jared Stanfield Open the ORCID record for Jared Stanfield [Opens in a new window]
Phong T. H. Ngo
Affiliation:
The Australian National [email protected]
Jared Stanfield*
Affiliation:
University of Oklahoma Price College of Business
*
[email protected] (corresponding author)
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Abstract

We provide evidence that managerial incentives to manipulate real activities can influence the effectiveness of fiscal policy. Increases in federal spending lead government-dependent firms to expand research and development (R&D) investment whereas industry-peer firms contract. The net result is a reduction in industry-level R&D investment. We find evidence of a novel mechanism for the crowding out of peer-firm investment: peer-firm managers respond to falling relative performance by cutting R&D to manage current earnings upward. We show that these differential responses manifest in firm value. These findings are robust to endogeneity and selection concerns as well as a battery of alternative explanations.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 3 , May 2022 , pp. 888 - 922
Copyright
© The Author(s), 2020. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We thank an anonymous referee and Paul Malatesta (the editor) for helpful comments that improved the paper. We also thank Bradley Blaylock, Jonathan Brogaard, Pascal Busch, Elizabeth Chuk, Silvio Contessi, Henrik Cronqvist, Lili Dai, Francois Derrien, Ran Duchin, Maya Eden, Alex Edwards, Joseph Fan, Vivian Fang, Hila Fogel-Yaari, Vidhan Goyal, Jarrad Harford, Richard Heaney, Brandon Julio, Woojin Kim, Adam Kolasinski, Chen Lin, Anjie Low, Ron Masulis, Michael Minnis, Vivek Raval, Guillaume Roger, Denis Sosyura, Larry Schmidt, Richard Sloan, Meijun Qian, Alex Vladilyev, Takeshi Yamada, Luo Zuo, and seminar participants at the Australian National University, Ludwig Maximilian University Munich, University of Adelaide, University of Melbourne, University of Utah, University of Western Australia, 2017 American Accounting Association Annual Meeting, 2017 Munich Summer Institute Conference, 2016 University of British Columbia (UBC) Summer Conference, 2016 Financial Management Association (FMA) Asia Conference, 2016 Financial Institutions, Regulation and Corporate Governance Conference (Melbourne Business School), 2016 Australia-Japan Research Centre, Hitotsubashi Institute for Advanced Study Conference on Recent Issues in Finance and Macroeconomics, and the 2015 Financial Research Network (FIRN) Corporate Finance Meeting for helpful discussions and comments.

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