Earnings expectations and discretionary research and development spending

A study examines the relationship between expenditures for research and development (R&D) and earnings expectations. The analysis examines changes in R&D expenditures when earnings vary from analysts' predictions and finds evidence of a direct relation between the variables. Moreover, after controlling for financial condition and investment opportunities, the analysis finds the relationship between unexpected R&D spending and unexpected earnings appears to be approximately linear over unexpected earnings values. To the extent that managers focus on short-run earnings, R&D spending may be negatively impacted when earnings fall short of analysts' expectations.