R&D, Expected Profitability, and Expected Returns

Abstract

Current R&D expenditures forecast cash-based operating profitability up to three years in the future and sometimes as much as ten years, but do not forecast asset growth. High R&D firms have positive loadings on a cash-based operating profitability factor, and zero alphas. Capitalizing R&D to augment book values with intangible assets is unnecessary for asset pricing, so long as expected profitability is explicitly recognized as a determinant of expected returns.

Keywords: Research & Development, Intangibles, Profitability, Asset Pricing, Expected Returns, Accruals

JEL Classification: G11, G12, G13