Managerial Conservatism and Rational Information Acquisition

Managerial behavior that is rational and profit-maximizing sometimes will seem to be overly conservative. If the valuation of innovations contains white noise and the status quo would be preferred to random innovation, then any innovation that does not appear substantially better than the status quo should be rejected, for reasons arising from regression toward the mean. The more successful the firm, the higher is the optimal acceptance threshold and conservative bias. Other things equal, more successful firms will spend less on research, adopt fewer innovations, and be less likely to advance the industry’s best practice.