26 Pages Posted: 21 Apr 2012
Date Written: April/May 2012
This study shows that future abnormal returns to R&D increases are concentrated around subsequent earnings announcements. It further shows that market expectations, implied from stock prices, underestimate the future earnings benefits of increase in R&D. Finally, it documents that in their forecasts of future earnings, security analysts also underestimate the effect of increase in R&D spending. These results suggest that future abnormal returns following R&D increases are at least in part due to the market's underestimation of the earnings benefits of R&D increases. The finding in this study contributes to the longstanding debate in accounting on whether the US GAAP requirement to expense R&D costs when incurred causes investors to underestimate the benefits of R&D.
Keywords: R&D increases, mispricing, underestimation of future earnings, analysts’ forecasts
Suggested Citation: Suggested Citation
Ali, Ashiq and Ciftci, Mustafa and Cready, William M., Market Underestimation of the Implications of R&D Increases for Future Earnings: The US Evidence (April/May 2012). Journal of Business Finance & Accounting, Vol. 39, Issue 3‐4, pp. 289-314, 2012. Available at SSRN: https://ssrn.com/abstract=2042956 or http://dx.doi.org/10.1111/j.1468-5957.2012.02282.x
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