The effect of R&D on future returns and earnings forecasts

The effect of R&D on future returns and earnings forecasts Prior studies attribute the future excess returns of research and development activity (R&D) firms to either compensation for increased risk or to mispricing. We suggest a third explanation and show that neither the level of R&D investment nor the change in R&D investment explains future returns. Rather, the positive future returns that prior studies attribute to R&D investment are actually due to the component of the R&D firm’s realized return that is unrelated to R&D investment but present in R&D firms. Our results suggest that the excess returns of R&D firms are part of the larger value/growth anomaly. In addition, we show that while future earnings are positively associated with current R&D, errors in earnings expectations by investors and analysts are not related to R&D investment. Review of Accounting Studies Springer Journals

The effect of R&D on future returns and earnings forecasts

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Springer US
Copyright © 2012 by Springer Science+Business Media, LLC
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
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