The changing implications of research and development expenditures for future profitability

Asher Curtis (), Sarah McVay () and Sara Toynbee ()
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Asher Curtis: University of Washington
Sarah McVay: University of Washington
Sara Toynbee: University of Texas at Austin

Review of Accounting Studies, 2020, vol. 25, issue 2, No 1, 405-437

Abstract: Abstract We document strong evidence of a declining relation between R&D and future profitability, which coincides with a number of important economic changes, including a significant increase in R&D spending. We identify several contributors to this decline, including changes in the nature and riskiness of R&D projects and a shift in the types of firms undertaking R&D in our sample. We also demonstrate variation in the implications of R&D for future profitability, consistent with diminishing marginal returns to R&D investments. Overall, our evidence suggests that, in earlier periods, investments in R&D offered high returns in U.S. public firms but that in more recent times these returns have stabilized at lower levels. Our study offers important insights for financial statement users, managers, and researchers.

Keywords: R&D; Earnings implications; Forecasting (search for similar items in EconPapers)
JEL-codes: M41 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (14)

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DOI: 10.1007/s11142-019-09528-6

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