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

Phong T.H. Ngo; Jared Stanfield

doi:10.1017/S0022109020000927

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

Phong T.H. Ngo^*, Jared Stanfield

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

11 Citations (Scopus)

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 (RD) investment whereas industry-peer firms contract. The net result is a reduction in industry-level RD 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 RD 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.

Original language	English
Pages (from-to)	888-922
Number of pages	35
Journal	Journal of Financial and Quantitative Analysis
Volume	57
Issue number	3
DOIs	https://doi.org/10.1017/S0022109020000927
Publication status	Published - 14 May 2022

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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 (RD) investment whereas industry-peer firms contract. The net result is a reduction in industry-level RD 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 RD 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.",

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AB - 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 (RD) investment whereas industry-peer firms contract. The net result is a reduction in industry-level RD 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 RD 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.

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

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