The Effect of R&D on Future Returns and Earnings Forecasts

42 Pages Posted: 3 Jun 2011 Last revised: 31 Aug 2011

See all articles by Robert J. Resutek

Robert J. Resutek

University of Georgia - J.M. Tull School of Accounting

Dain C. Donelson

University of Texas at Austin - Red McCombs School of Business

Date Written: May 1, 2011

Abstract

Prior studies attribute the future excess return patterns of R&D firms to either compensation for increased risk from R&D or to mispricing by investors. We suggest a third explanation for the future excess returns of R&D firms. We show that neither the level of R&D investment nor the change in R&D investment explains future returns. Rather, the positive future returns prior studies attribute to R&D investment is actually due 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, the earnings forecasts of investors and analysts are not affected by a firm's R&D investment policy.

Keywords: R&D, value/growth, analyst forecasts, mispricing

JEL Classification: G14, M41

Suggested Citation

Resutek, Robert J. and Donelson, Dain C., The Effect of R&D on Future Returns and Earnings Forecasts (May 1, 2011). Review of Accounting Studies, Forthcoming; Tuck School of Business Working Paper No. 2011-97. Available at SSRN: https://ssrn.com/abstract=1856052

Robert J. Resutek (Contact Author)

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States

Dain C. Donelson

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States
512-232-3733 (Phone)

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