Analyst Coverage, R&D Spending Stickiness, and Firm Value

Abstract

R&D investment serves as the core engine for enterprises to break through existing technological bottlenecks, cultivate core competitiveness, and drive long-term sustainable development. Exploring firms’ R&D spending behavior is crucial for stakeholders to understand the logic behind managerial R&D decisions and thereby formulate effective decisions. Against the backdrop of heightened economic volatility both domestically and internationally, enterprises are confronting a steady rise in operational uncertainty, and fluctuations in sales revenue that encompass both upward and downward trends have become a prevalent norm. These developments pose formidable challenges to management’s allocation of R&D resources. Given that R&D budgets are predominantly formulated based on sales revenue, investigating how R&D spending changes with sales during periods of sales decline versus growth helps uncover the managerial decision-making logic underlying R&D investments. As key information intermediaries, financial analysts collect and disseminate R&D-related information to the capital market, thereby influencing managerial decisions regarding R&D. Then, will managers maintain spending on R&D during sales downturns? In other words, does R&D spending exhibit sticky characteristics? What is the underlying logic? How do financial analysts influence R&D spending stickiness? And will this, in turn, lead to an increase in firm value?

Using Chinese listed firms from 2015 to 2023 as a research sample, this dissertation examines the existence of R&D spending stickiness and analyzes its economic implications, explores the impact of analyst coverage on R&D spending stickiness, and further tests the value relevance of R&D spending stickiness. This dissertation finds that: 1) R&D spending exhibits a smaller decrease amid falling sales than its growth amid sales increases of a corresponding margin, indicating that R&D spending stickiness exists. Given that managerial decisions to sustain R&D amid sales declines are largely driven by the R&D project quality, R&D spending stickiness serves as a gauge of R&D input quality; 2) R&D spending stickiness intensifies with increased analyst coverage. Analysts reduce information asymmetry regarding the expected future benefits of R&D spending, enhance the R&D spending quality, and facilitate sustained R&D investment during sales declines. Cross-sectional tests illustrate that analyst coverage yields a more notable impact on R&D spending stickiness in situations where information uncertainty is higher—among firms audited by non-big 10 auditors, small firms, high growth firms and firms in high-tech industries. The impact is stronger when there is less dispersion in analysts’ earnings forecasts and weaker when companies fail to meet analysts’ earnings forecasts. Furthermore, analysts exert a more remarkable influence in non-state-owned enterprises than in state-owned enterprises; 3) R&D spending stickiness exerts a positive impact on firm value, and analyst coverage strengthens the positive correlation between R&D spending stickiness and firm value. Further analysis shows that R&D spending stickiness drives firms’ future sales growth and boosts their future gross margins, which in turn enhances firms’ future profitability and increases their future value.

In contrast to existing literature, this dissertation makes three main contributions as follows.

First, this dissertation conducts an exploratory study on the formation mechanism of R&D spending stickiness and reveals the decision-making logic of management in allocating R&D resources under the context of sales fluctuations. It systematically investigates the asymmetric adjustment of R&D spending amid sales fluctuations and clarifies the trade-off mechanism that managers face between “cutting R&D to secure current profitability” and “maintaining R&D to support future earnings” when sales decline. Empirical findings indicate that managers generally tend to maintain R&D investments in phases of falling sales to pursue long-term profit growth. This decision is primarily driven by two factors: managers’ expectations regarding R&D’s future value and the costs of adjusting R&D resources. This dissertation not only enriches the extant literature on cost stickiness but also extends the theoretical boundary to incorporate strategic, forward-looking, and knowledge-intensive expenditure items. Given that managers’ decisions to preserve or cut back on R&D resources amid sales declines essentially depend on their assessment of R&D quality, this dissertation introduces stickiness as an innovative approach to measuring the quality of R&D spending. By incorporating a quantitative measure of R&D input quality, this dissertation provides novel theoretical insights and empirical evidence for refining R&D evaluation systems.

Second, this dissertation clarifies the impact of analyst coverage on managers’ decision-making regarding R&D spending amid sales downturns and reveals how corporate economic fluctuations affect the linkage between analyst following and corporate R&D investment. Due to the coexistence of analysts’ information role and pressure role, existing research has not reached a unified conclusion regarding how analyst coverage affects corporate R&D investments. Prior research has predominantly centered on analysts’ roles in stable or growing market environments, where firms retain greater flexibility to balance long-term investments against short-term gains. This dissertation introduces sales downturns as a specific context, where executives face tightened cash flows, intensified earnings pressure, and heightened uncertainty about future market conditions. It demonstrates that analyst coverage exerts a favorable impact on R&D spending stickiness, providing robust support for the dominance of analysts’ informational role in Chinese market. In addition, the research findings indicate that analyst coverage prompts managers to engage in more value-generating R&D activities, which offers insights into the function of analysts in evaluating the value of intangible assets associated with R&D spending.

Third, different from traditional cost stickiness, this dissertation focuses on R&D spending stickiness oriented toward long-term value creation, demonstrates the value relevance of R&D spending stickiness, and expands the research perspective on the economic consequences of cost stickiness. Extant literature presents mixed findings regarding whether cost stickiness enhances or erodes firm value. This inconsistency arises from the complex drivers of cost stickiness as it may either reflect managers’ rational decisions to retain resources to avoid adjustment costs or signal managerial inefficiency in cost control driven by self-interest. This dissertation examines R&D spending stickiness—a distinct category of cost behavior aimed at sustaining long-term value creation, and finds that R&D spending stickiness serves as a credible signal of managers’ positive perceptions of R&D quality, which contributes to enhanced firm value. Thus, the dissertation yields novel insights into the economic consequences of cost stickiness and identifies a novel fundamental signal closely associated with firm value. Furthermore, the dissertation reveals that the signaling effect of R&D spending stickiness is more salient under conditions of elevated analyst coverage, which corroborates financial analysts’ informational role within capital markets.

Date of Award	2 Apr 2026
Original language	English
Awarding Institution	City University of Hong Kong
Supervisor	Bing LI (Supervisor) & Fangjun Wang (External Supervisor)