Managerial ability and R&D spending stickiness: Evidence from China

We investigate how managerial ability is related to R&D spending stickiness, where stickiness is the degree to which downward elasticity is less than upward elasticity of R&D spending in relation to changes in sales. In the case of R&D, sales represent cash flows that may support R&D spending as opposed to a direct driver of R&D spending. High ability managers may calibrate R&D spending to sales to achieve more stable earnings in the short run, reducing R&D spending stickiness, or they may continue to spend on promising R&D projects when sales decline, increasing R&D spending stickiness. For a sample of Chinese firms from 2010 to 2019, we find that R&D stickiness decreases with managerial ability, suggesting that higher ability managers prefer more stable earnings in the short term. We test whether innovation output increases or decreases with managerial ability and find that it decreases with managerial ability. In contrast, we find that innovation output increases with R&D stickiness.