The impact of Republican CEO ideology and political alignment on R&D spending and business performance

Abstract

Based on a sample of firms in the S&P 1500 index covering the years 1993 to 2016, we find that firms with Republican CEOs spend less on R&D compared to their Democratic counterparts. However, Republican CEOs ratchet up their R&D spending when a Republican is in the Oval Office. Furthermore, we find that R&D spending is negatively related to return on assets (ROA), which is indicative of the risky nature of R&D spending, but R&D is positively related to Tobin Q, a longer‐term performance measure. As a consequence, when Republican CEOs manage under a Republican president, the effect of accelerated R&D spending is to send ROA lower, owing to the short‐term negative effect of R&D spending. Additionally, due to overspending on R&D by Republican CEOs under a Republican president, the generally positive effect of R&D on Tobin Q is weakened. It seems social capital has its dark side as it can mislead CEOs to make opportunistic but unwise R&D spending decisions. Overall, Republican CEOs, relative to Democratic CEOs, have higher short‐term performance (ROA), and lower long‐term performance (Tobin Q) owing to reduced R&D spending. Our results have research, managerial, and policy implications.