Firm Strategy and Outcome Uncertainty in R&D Firms

We evaluate the impact of firm strategy on the variability of future performance for R&D firms and how firm strategy mediates the relation between R&D expenditures and firm outcome uncertainty of sales revenue, earnings, and operating cash flows. Following prior literature, we run exploratory factor analysis using resource allocations in the past towards intended strategy to measure the realized strategy pursued by firms. We find that, in R&D firms, differentiation strategy leads to lower variability of future sales, earnings, and operating cash flows. In contrast, cost leadership strategy leads to higher variability of future sales and operating cash flows, and lower variability of future earnings. Our study is the first, to our knowledge, to empirically document the impact of firm strategy of R&D firms on the variability of various future performance measures. Using mediation analysis, we further document that differentiation strategy negatively mediates the association between R&D expenditures and variability of sales revenue, earnings, and operating cash flows. While cost leadership strategy negatively mediates the association between R&D expenditures and variability of sales and variability cash flows, it positively mediates the association between R&D expenditures and variability of earnings.