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

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...

Full description

Saved in:
Bibliographic Details
Published in:Journal of financial and quantitative analysis 2022-05, Vol.57 (3), p.888-922
Main Authors: Ngo, Phong T. H., Stanfield, Jared
Format: Article
Language:English
Subjects:
Companies
Crowding
Earnings
Fiscal policy
Government spending
Incentives
Investment advisors
Investments
R&D
Research & development
Research & development expenditures
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary: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.
ISSN:0022-1090
1756-6916
DOI:10.1017/S0022109020000927