DO PRIOR R&D PROJECT OUTCOMES IMPACT THE PURSUIT OF INNOVATION? IT DEPENDS ON THE R&D ACCOUNTING METHOD

I experimentally investigate how the economic outcome (i.e., successful development or failed development) of a prior Research & Development (R&D) project affects the willingness of managers to invest in a related, but distinct project, conditional on the accounting method. Consistent with attribute substitution theory, I predict and find that the influence of the prior R&D project’s outcome is weaker when development costs are expensed compared to capitalized. I also discuss findings that illustrate how the consideration of the accounting impact changes managers’ decisions compared to an economic benchmark. These findings have important implications for regulators and managers by highlighting how R&D project outcomes and accounting methods can change managers’ willingness to pursue innovative R&D investments.