The impact of earnings pressure on exploratory innovation

While earnings expectation has been shown to determine a firm’s investment decisions, the knowledge about how such expectation influences a firm’s investment horizon for innovation is still blurred. This study therefore addresses this research issue by examining the relationship between earnings pressure and exploratory innovation while investigating the moderating effects of cross-rival effect and resource availability. By examining high-tech industrial firms in S&P 1500 from 2000 to 2012, the results indicate that stock analysts, as information intermediaries between innovation firms and the capital market, impose pressure through earnings forecasts on firms’ exploratory innovation. Our findings also reveal that the earnings pressure-exploratory innovation relationship can be mitigated when its competitors encounter a higher level of earnings pressure. However, a firm’s financial slack shows less significant association to moderate the earnings pressure-exploratory innovation relationship. Possible explanations for the results in regard to their theoretical and practical implications are discussed in this study.