Differentiation strategy, R&D intensity, and sustainability of accounting earnings: With a focus on biotech firms

Abstract

In this paper, we examine the association between management strategy and a firm's sustainability of accounting earnings over almost 20,000 firm-year observations in South Korea between 2000 and 2017. Using the differentiation strategy developed by Porter for measuring management strategy, we find that firms that implement the differentiation strategy make more-sustainable accounting earnings, as measured by the persistence of return on assets. In addition, regardless of the magnitude of R&D investments, proper implementation of the differentiation strategy is positively associated with the sustainability of accounting outcomes. However, except when sales increase, a reduction in R&D intensity has a negative impact on the persistence of accounting income for biotech firms. This is because biotech firms are not be able to continue to strengthen core competencies and thus cannot ultimately implement a differentiating strategy effectively.