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Are CEOs Afraid of Wall Street?

It used to be that when major companies wanted to grow their business, they would reinvest profits into research and development to build new and innovative products. This sounds like a solid game plan, but there is one big problem with this approach… it takes time.

Unfortunately, CEOs do not always have the luxury of time. Every three months, publicly traded companies report their quarterly results, and Wall Street can seriously punish a company's stock when earnings fail to hit expectations.

In some cases, stocks can get hit even when earnings do come in above analyst estimates if earnings growth slows down, or if the company issues a statement that they expect earnings growth to slow in the months ahead.

Investing in research and development is an easy way for a company's earnings growth to slow. It takes years to develop new products, and Wall Street does not have the patience to wait years for the investment to pay off.

A recent study shows that a remarkable number of CEOs believe that investing in research and development is not helping their company's future growth.

The consulting firm Accenture (ACN) conducted the study, and while 93% of CEOs in the study believed that long-term success for their company was dependent on the ability to innovate, only 16% said that they are seeing benefit from recent investments in R&D.

The study also revealed that 46% of the companies had become more risk adverse when it comes to considering new breakthrough ideas, with 45% saying that their companies are pursuing smaller, safer opportunities instead of trying to come up with the next breakthrough idea.

The first question that comes to my mind, is that if so many CEOs are not seeing benefit from their R&D why aren't they making the chance to improve their operations. Only 34% of the respondents said that they believe their companies have a well-defined innovation strategy. Instead of trying to build a better team, it seems like they are instead giving their current team easier jobs to do.

Is this really how a company should operate? If my boss was not seeing any benefit from my work, should he find someone better, or just give me easier jobs to do for the same pay? He should find someone new.

But perhaps this is just a convenient way for companies to avoid stepping out on a limb and investing heavy sums of money to come up with a breakthrough product. It is much easier to say that the risk is not worth the reward than it is to actually take the risk.

I believe that the fear of Wall Street punishing their stocks is a major reason why companies are taking a more conservative approach to research and development. Wall Street will never learn to be patient with companies, but companies need to remember that without risk, there can be no reward.

Michael Fowlkes

Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.