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The effect of R&D on future returns and earnings forecasts
Authors:Dain C. Donelson  Robert J. Resutek
Affiliation:1. McCombs School of Business, University of Texas at Austin, Austin, TX, USA
2. Tuck School of Business, Dartmouth College, 100 Tuck Hall, Hanover, NH, 03755, USA
Abstract:Prior studies attribute the future excess returns of research and development activity (R&D) firms to either compensation for increased risk or to mispricing. We suggest a third explanation and show that neither the level of R&D investment nor the change in R&D investment explains future returns. Rather, the positive future returns that prior studies attribute to R&D investment are actually due to the component of the R&D firm??s realized return that is unrelated to R&D investment but present in R&D firms. Our results suggest that the excess returns of R&D firms are part of the larger value/growth anomaly. In addition, we show that while future earnings are positively associated with current R&D, errors in earnings expectations by investors and analysts are not related to R&D investment.
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