An Examination of Long-Term Abnormal Stock Returns and Operating Performance Following R&D Increases

Authors

Allan Eberhart, Georgetown UniversityFollow
William F. Maxwell, Southern Methodist University (SMU) - Finance DepartmentFollow
Akhtar R. Siddique, Government of the United States of America - Office of the Comptroller of the Currency (OCC)Follow

Publication Date

8-1-2004

Abstract

We examine a sample of 8,313 cases, between 1951 and 2001, where firms unexpectedly increase their research and development expenditures (R&D) by a significant amount. We find consistent evidence of a mis-reaction, as manifested in the significantly positive abnormal stock returns that our sample firms' shareholders experience following these increases. We also find consistent evidence that our sample firms experience significantly positive long-term abnormal operating performance following their R&D increases. Our findings suggest that R&D increases are beneficial investments, and that the market is slow to recognize the extent of this benefit (consistent with investor underreaction).

Document Type

Article

Keywords

R&D, market efficiency

Disciplines

Finance

Source

SMU Cox: Finance (Topic)

Language

English