How does inconsistent negative performance feedback affect the R&D investments of firms? A study of publicly listed firms

We analyze the innovation incentives of firms in a model in which a firm's R&D investment is endogenous to performance comparisons due to performance feedback from historical and social comparisons. Performance feedback reveals relevant information to managers, improves their real decisions, and enhances their innovation efforts. This feedback effect has an asymmetric effect on R&D investing behavior: inconsistent (consistent) performance feedback decreases (increases) the R&D intensity of the firm. Such inconsistency gives rise to an endogenous limit to problemistic searches, whereby managers will refrain from initiating problemistic searches and increase R&D investment based on inconsistent negative performance feedback. Thus, inconsistent feedback is incorporated more slowly into R&D investments than consistent feedback, potentially leading to low R&D investment. Moreover, family control strengthens this asymmetry. Compared with non-family firms, the negative impact of inconsistent negative feedback on R&D investment is stronger in family firms.