An Examination of Long-Term Abnormal Stock Returns and Operating Performance Following R&D Increases

Posted: 1 Aug 2004  

Allan Eberhart

Georgetown University

William F. Maxwell

SMU - Cox School

Akhtar R. Siddique

Government of the United States of America - Risk Analysis Division

Abstract

We examine a sample of 8,313 cases, between 1951 and 2001, where firms unexpectedly increase their research and development expenditures (R&D) by a significant amount. We find consistent evidence of a mis-reaction, as manifested in the significantly positive abnormal stock returns that our sample firms' shareholders experience following these increases. We also find consistent evidence that our sample firms experience significantly positive long-term abnormal operating performance following their R&D increases. Our findings suggest that R&D increases are beneficial investments, and that the market is slow to recognize the extent of this benefit (consistent with investor underreaction).

Keywords: R&D, market efficiency

JEL Classification: G14, G31

Suggested Citation

Eberhart, Allan and Maxwell, William F. and Siddique, Akhtar R., An Examination of Long-Term Abnormal Stock Returns and Operating Performance Following R&D Increases. Journal of Finance, Vol. 59, No. 2, pp. 623-650. Available at SSRN: https://ssrn.com/abstract=560043

Allan C. Eberhart (Contact Author)

Georgetown University ( email )

McDonough School of Business
Washington, DC 20057
United States
202-687-4584 (Phone)

William F. Maxwell

SMU - Cox School ( email )

Maguire Bldg, RM 440C
Dallas, TX, TX 75214
United States

Akhtar R. Siddique

Government of the United States of America - Risk Analysis Division ( email )

400 7th Ave
Washington, DC 20219
United States
202-649-5526 (Phone)

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