The Implications of Long-Term Performance Plans and Institutional Ownership for Firms' Research and Development (R&D) Investments

Abstract

This study examines whether long-term performance plans and institutional holdings are associated with the level of R&D spending in firms. This paper contributes to the growing literature on the impact of mechanisms to mitigate the short-term focus of managers and investors. This study, unlike prior work, examines two mechanisms simultaneously, long-term performance plans and institutional investor holdings. We find no evidence that the adoption of long-term performance plans has implications for R&D spending. We do find evidence that holdings by institutional investors are positively associated with the level of R&D spending in the firm. These results indicate that the horizon of institutional investors may influence managers' planning horizons and how they decide on long-term investments, but managers' decisions on R&D investments are not affected by the introduction of performance plans. When examining the influence of R&D spending on institutional holdings, the simultaneous equations show that holdings by banks and insurance companies are lower in firms that have higher R&D. In contrast, holdings by “other” institutions are higher in firms that have higher R&D.