Curbing myopic R&D behavior: How private meetings serve as a channel

Abstract

This study considers whether investor-manager private meetings serve as a potential channel to detect and restrain corporate myopic R&D behavior in firms subject to earnings pressure. To do so, we exploit a unique dataset of corporate site visits, a particular form of private meetings. Our results indicate that the myopic R&D behavior of firms under earnings pressure is significantly lower when the firm hosts more institutional investors’ site visits. To further tease out the underlying mechanisms, we conduct cross-sectional analyses and find that the constraining effect of site visits is greater when there is more need for monitoring by institutional investors, i.e., when the information environment is weak and product market competition is low. Further, this monitoring effect is stronger when more questions are asked about R&D during the site visit, when the site visit involves more than one institutional investor, and when the site visit occurs earlier in the fiscal year. The main findings are robust to alternative model specifications, estimation approaches, and endogeneity issues. Overall, our evidence suggests that site visits cannot only reduce information asymmetry, but they have an important monitoring role as well.