Excess Returns to R&D-Intensive Firms

43 Pages Posted: 5 Feb 2002

See all articles by Dennis J. Chambers

Dennis J. Chambers

Kennesaw State University

Ross Jennings

University of Texas at Austin - Department of Accounting

Robert B. Thompson

American University

Date Written: January 2002


Recent studies indicate that both current R&D investment levels and current or recent changes in R&D investment are positively associated with subsequent excess (risk-adjusted) stock returns. The tentative explanation offered for these results is that shares of R&D-intensive firms are "mispriced" because investors fail to see through earnings distortions caused by conservative accounting for R&D costs. However, an alternative explanation is that conventional controls for risk do not completely capture the riskiness of R&D-intensive firms, causing measured excess returns for these firms to be biased upward. This study provides evidence useful for distinguishing between the mispricing and risk explanations for R&D-related excess returns. Overall, our empirical results suggest that the positive association between R&D investment levels and excess returns is more likely to result from failure to control adequately for risk than from mispricing. On the other hand, our results do not rule out the possibility of a second source of excess returns that are due to mispricing and that are associated with changes in the level of R&D investment.

Keywords: Research and development; Intangibles; Conservatism; Market efficiency; Mispricing

JEL Classification: M41, G14, O32

Suggested Citation

Chambers, Dennis J. and Jennings, Ross and Thompson, Robert B., Excess Returns to R&D-Intensive Firms (January 2002). Available at SSRN: https://ssrn.com/abstract=299159 or http://dx.doi.org/10.2139/ssrn.299159

Dennis J. Chambers (Contact Author)

Kennesaw State University ( email )

560 Parliament Garden Way
MD #0402
Kennesaw, GA 30144
United States
470-578-6375 (Phone)
470-578-9018 (Fax)

Ross Jennings

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-471-5340 (Phone)
512-471-3904 (Fax)

Robert B. Thompson

American University ( email )

4400 Massachusetts Avenue NW
Washington, DC 20816-8044
United States

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