Managerial Over-Optimism and Research and Development Investment: Evidence from Korean Initial Public Offering Firms*

Examining 1114 Korean firms between 2001 and 2015, we find that positive discretionary research and development expenditures in initial public offering years positively relate to future investment but do not significantly affect future performance. Thus, managerial optimism rather than signaling likely drives over-investment. High-tech firms generally over-invest more, and those that over-invest are more likely to delist within 5 years. Future research and development expenditures are positively associated with future operating and stock performance only for high-tech firms with low discretionary research and development expenditures around initial public offerings. Successful initial public offerings may create over-confidence, resulting in inefficient expenditures.