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

Dain C. Donelson and Robert J. Resutek ()
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Dain C. Donelson: University of Texas at Austin
Robert J. Resutek: Dartmouth College

Review of Accounting Studies, 2012, vol. 17, issue 4, No 4, 848-876

Abstract: Abstract 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.

Keywords: R&D; Value/growth; Investment; Mispricing; Earnings forecasts; Analysts (search for similar items in EconPapers)
JEL-codes: G14 M41 (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1007/s11142-011-9179-y

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