Managerial Overconfidence and Cost Behavior of R&D Expenditures

• Main Authors: Kang Sung Hur, Dong Hyun Kim, Joon Hei Cheung
• Format: Article
• Language: English
• Published: MDPI AG 2019-09-01
• Series: Sustainability
• Subjects: overconfidence; R& D; cost behavior; cost stickiness
• Online Access: https://www.mdpi.com/2071-1050/11/18/4878

This study examines the impact of a CEO’s confidence level on decisions regarding research and development (R&D) expenditures. R&D is an important part of a company’s strategy for achieving long-term sustainable growth. However, due to its discretionary nature, some CEOs choose to reduce R&D costs to enhance short-term performance. In other words, R&D cost behavior may vary depending on CEO characteristics. This study examines whether, in an effort to improve their firm’s future performance, CEOs who are highly overconfident tend not to actively decrease R&D expenditures even when sales decrease. We posit that CEO overconfidence affects the cost behavior of R&D spending that is not related to their personal privileges. A cost behavior model was utilized to verify the relationship between CEOs’ propensity for overconfidence and R&D expenditures. Our findings show that highly overconfident CEOs tend not to take actions to reduce R&D costs even if sales decrease because CEO overconfidence tends to be positively related to R&D. Since R&D represents both costs and long-term investments, policy support for capitalizing R&D costs can be considered as enhancing the sustainability of businesses.