The Changing Implications of Research and Development Expenditures for Future Profitability
42 Pages Posted: 1 Mar 2014 Last revised: 16 Apr 2018
Date Written: February 8, 2018
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: Suggested Citation