The Changing Implications of Research and Development Expenditures for Future Profitability

42 Pages Posted: 1 Mar 2014 Last revised: 16 Apr 2018

See all articles by Asher Curtis

Asher Curtis

University of Washington

Sarah E. McVay

University of Washington

Sara Toynbee

University of Texas at Austin

Date Written: February 8, 2018

Abstract

Aggregate investment in research and development (R&D) has increased significantly over time. Coinciding with this increase in spending, we provide evidence of an economically and statistically significant decline in the profitability associated with R&D expenditures. This result is consistent with diminishing marginal returns to R&D expenditures over time in which spending has outpaced investment opportunities. Additional analyses demonstrate the pervasiveness and robustness of this result and cross-sectional tests support our interpretation of diminishing marginal returns. Despite the economic significance of the decline, analysts’ long-term earnings growth forecast errors are systematically optimistic for firms with high R&D intensity in the later part of our sample period. This evidence highlights the complexities associated with forecasting long-term earnings growth from innovation.

Keywords: R&D; Earnings Implications; Capital Markets; Analysts; Investors

JEL Classification: M41, M45

Suggested Citation

Curtis, Asher and McVay, Sarah E. and Toynbee, Sara, The Changing Implications of Research and Development Expenditures for Future Profitability (February 8, 2018). Available at SSRN: https://ssrn.com/abstract=2402886 or http://dx.doi.org/10.2139/ssrn.2402886

Asher Curtis

University of Washington ( email )

Seattle, WA 98195
United States

Sarah E. McVay

University of Washington ( email )

Box 353200
Seattle, WA 98195-3200
United States

Sara Toynbee (Contact Author)

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
604
Abstract Views
2,851
rank
43,555
PlumX Metrics