Contradictory yet Coherent? Inconsistency in Performance Feedback and R&D Investment Change

Abstract

In this paper, we study to what extent inconsistent feedback signals about performance affect firm adaptive behavior in terms of changes made to research-and-development (R&D) investments. We argue that inconsistency in performance feedback—based on discrepancies between two distinct performance signals—affects the degree to which such investments will be changed. Our aim is to show that accounting for inconsistent performance feedback is necessary as predictions for the direction of change in R&D investments based on the individual performance feedback signals are contradictory. Furthermore, we contribute by proposing a holistic consideration mechanism as an alternative to the selective attention mechanism previously applied to inconsistent performance feedback. Our findings show that the impact of inconsistency depends on the exact configuration of the underlying performance feedback signal discrepancies. While consistently negative performance feedback signals would amplify their impact in stimulating increased R&D investments, inconsistent performance feedback signals created more nuanced effects. Having lower performance compared to an industry-based peer group—despite doing well compared to the previous year—made firms decrease their R&D investments. For the opposite case of inconsistent performance feedback, we did not find an effect on change in R&D investments. These findings support to a degree our contention that explaining the effects of inconsistent performance feedback requires a holistic consideration theoretical mechanism instead of one involving selective attention. In sum, these findings suggest future research should take into account the differences between distinct instances of inconsistent performance feedback.