R&D Investment and Firm Growth: The Role of Tangible Asset Complementarity

42 Pages Posted: 9 Jan 2018 Last revised: 7 May 2018

See all articles by Suresh Radhakrishnan

Suresh Radhakrishnan

JSOM, University of Texas at Dallas

Huajie Wang

Fudan University, School of Management, Students

Kemin Wang

Fudan University - School of Management

Zhenmei (Judy) Zhu

Fudan University - School of Management

Date Written: December 1, 2017

Abstract

Prior accounting and finance literatures document a positive relation between R&D investment and future operating performance, implicitly assuming that the benefits from R&D are independent of other resources. However, the economics and strategy literature provides a framework that other resources, such as tangible assets, complement R&D assets in achieving future growth. We combine the above two strands of literature and examine the complementary effect of tangible and R&D assets on future growth in operating performance. Consistent with the asset complementarity thesis, we find that the positive relation between R&D investment and future firm growth is stronger for firms with more tangible assets, and this relationship is not attributable to risk. These findings are robust to different measures of future growth in operating performance: earnings and cash flows. We also find that analysts and investors incorporate the complementary effect in forecasting future growth in operating performance and stock price. Collectively, the empirical evidence shows that tangible and R&D assets in concert are positively associated with future growth.

Keywords: R&D Investment, Tangible Assets, Operating Performance, Assets Complementarity

JEL Classification: O30, O32, M41

Suggested Citation

Radhakrishnan, Suresh and Wang, Huajie and Wang, Kemin and Zhu, Zhenmei, R&D Investment and Firm Growth: The Role of Tangible Asset Complementarity (December 1, 2017). Available at SSRN: https://ssrn.com/abstract=3096806 or http://dx.doi.org/10.2139/ssrn.3096806

Suresh Radhakrishnan (Contact Author)

JSOM, University of Texas at Dallas ( email )

Mail Stop SM 41
800 West Campbell Road
Richardson, TX 75080
United States
972-883-4438 (Phone)
972-883-6811 (Fax)

Huajie Wang

Fudan University, School of Management, Students ( email )

No. 670, Guoshun Road
Shanghai
China

Kemin Wang

Fudan University - School of Management ( email )

No. 670, Guoshun Road
Shanghai, 200433
China

Zhenmei Zhu

Fudan University - School of Management ( email )

670 Handan Road
Shanghai
China

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