R&D Expenditure and Earnings Targets

Beatriz Garcia Osma and Steven Young

European Accounting Review, 2009, vol. 18, issue 1, 7-32

Abstract: This paper examines whether firms cut R&D spending in response to short-term earnings pressures and how equity markets interpret such behaviour. Failure to report positive earnings and earnings growth increases the probability of a subsequent cut in R&D spending, while pressure to report positive earnings and earnings growth in the current period leads to contemporaneous cuts in R&D investment. On average, investors place less weight on earnings increases accompanied by unexpected cuts in R&D spending. However, the magnitude of the valuation discount varies according to the perceived reason for the cut and the importance of R&D investment as a driver of firm value.

Date: 2009
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Citations: View citations in EconPapers (23)

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DOI: 10.1080/09638180802016718

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