A common view is that investors view steady firm-level R&D investment as evidence of the firm's commitment to R&D-based innovation. However, recent research shows that R&D expenditure volatility is positively related to firm performance, suggesting that higher levels of R&D expenditure volatility indicate effective governance of the R&D function. This paper shows that the relationship between R&D expenditure volatility and firm performance is stronger within firms that have higher levels of information asymmetry between the firm and its investors. This finding suggests that investors interpret R&D expenditure volatility as a good thing, and that this form of information takes on more significance in the absence of better sources of evidence. Innovative chemicals companies may reconsider conventional wisdom suggesting that consistent R&D expenditure conveys an emphasis on R&D-based innovation. Instead, firms can explain to investors that significant changes in R&D expenditure indicate that management is pToactively managing R&D projects and combating R&D overinvestment.
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