Does the Stock Market Underreact to R&D Increases?

Journal of Investment Management, Vol. 4, No. 1, First Quarter 2006

Posted: 22 Apr 2006

See all articles by Allan Eberhart

Allan Eberhart

Georgetown University

William F. Maxwell

Southern Methodist University (SMU) - Finance Department

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 that our sample firms are undervalued following their R&D increases as manifested in the significantly positive long-term stock returns that our sample firms' shareholders experience. We also find consistent evidence that our sample firms have 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, operating performance

JEL Classification: G00

Suggested Citation

Eberhart, Allan C. and Maxwell, William F. and Siddique, Akhtar R., Does the Stock Market Underreact to R&D Increases?. Journal of Investment Management, Vol. 4, No. 1, First Quarter 2006 . Available at SSRN: https://ssrn.com/abstract=897385

Allan C. Eberhart (Contact Author)

Georgetown University ( email )

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

William F. Maxwell

Southern Methodist University (SMU) - Finance Department ( email )

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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