R&D and Performance Persistence: Evidence from the United Kingdom
Posted: 26 May 2006 Last revised: 7 Sep 2008
Date Written: September 1, 2008
There is compelling evidence from both the United States and United Kingdom suggesting that R&D investment is positively related to operating and/or market performance. This study extends prior research on R&D and valuation by further examining the sustainability or persistence of operating growth and market performance as a result of R&D investments.
We use a large dataset of U.K. companies during the period 1990-2003 and our findings confirm the relation between R&D intensity and consistent growth in Sales and Gross Income, but only in the cases when a firm needs to engage in R&D activity because of the industry in which it operates.Moreover, our evidence indicates not only a positive relation between R&D intensity and subsequent risk-adjusted excess returns among firms that engage in R&D as testified by prior literature, but we also show that R&D intensity improves persistence in excess stock returns: the highest R&D-intensity firms are found to earn higher risk-adjusted excess returns more consistently than the sample median return, compared to lower R&D-intensity firms, as well as firms with no R&D. We interpret this finding as consistent with at least some form of market mispricing.
Keywords: R&D, Research and Development, Research, Development, Persistence, Intangibles
JEL Classification: G14, M41
Suggested Citation: Suggested Citation