An Examination of Long-Term Abnormal Stock Returns and Operating Performance Following R&D Increases
William F. Maxwell
SMU - Cox School
Akhtar R. Siddique
Office of the Comptroller of the Currency - Enterprise Risk Analysis Division
Journal of Finance, Vol. 59, No. 2, pp. 623-650
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).
Keywords: R&D, market efficiency
JEL Classification: G14, G31
Date posted: August 1, 2004
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