The Changing Implications of Research and Development Expenditures for Future Profitability

Review of Accounting Studies, Forthcoming

49 Pages Posted: 1 Mar 2014 Last revised: 14 Jan 2020

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: May 14, 2019

Abstract

We document strong evidence of a declining relation between R&D and future profitability, which coincides with a number of important economic changes including a significant increase in R&D spending. We identify several contributors to this decline, including changes in the nature and riskiness of R&D projects and a shift in the types of firms undertaking R&D in our sample (e.g., successive cohorts, STEM versus non-STEM firms). We also demonstrate variation in the implications of R&D for future profitability consistent with diminishing marginal returns to R&D investments. Overall, our evidence suggests that in earlier time periods, investments in R&D offered high returns in U.S. public firms, but that in more recent times these returns have stabilized at lower levels. Our study offers important insights for financial statement users, managers, and researchers.

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 (May 14, 2019). Review of Accounting Studies, Forthcoming, 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

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