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

Eberhart, Allan; Maxwell, William F.; Siddique, Akhtar R.

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

Posted: 1 Aug 2004

See all articles by Allan Eberhart

William F. Maxwell

Southern Methodist University (SMU) - Finance Department

Akhtar R. Siddique

Government of the United States of America - Office of the Comptroller of the Currency (OCC); Georgetown University

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).

Keywords: R&D, market efficiency

JEL Classification: G14, G31

Suggested Citation: Suggested Citation

Eberhart, Allan and Maxwell, William F. and Siddique, Akhtar R., An Examination of Long-Term Abnormal Stock Returns and Operating Performance Following R&D Increases. Available at SSRN: https://ssrn.com/abstract=560043