IDEAS home Printed from https://ideas.repec.org/a/eee/jaecon/v52y2011i1p62-80.html
   My bibliography  Save this article

Scale effects of R&D as reflected in earnings and returns

Author

Listed:
  • Ciftci, Mustafa
  • Cready, William M.

Abstract

Using returns to scale as a conceptual foundation, we explore how R&D-related earnings performance and earnings variability depend upon firm size. We find that the positive association between the level of future earnings and R&D intensity increases with firm size, and that the positive association between the volatility of future earnings and R&D intensity decreases with firm size, consistent with R&D productivity increasing with scale. We also show that R&D scale is associated with lower market returns, consistent with the idea that R&D investment risk declines with scale.

Suggested Citation

  • Ciftci, Mustafa & Cready, William M., 2011. "Scale effects of R&D as reflected in earnings and returns," Journal of Accounting and Economics, Elsevier, vol. 52(1), pages 62-80, June.
  • Handle: RePEc:eee:jaecon:v:52:y:2011:i:1:p:62-80
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165410111000206
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Rebecca Henderson & Iain Cockburn, 1996. "Scale, Scope, and Spillovers: The Determinants of Research Productivity in Drug Discovery," RAND Journal of Economics, The RAND Corporation, vol. 27(1), pages 32-59, Spring.
    2. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    3. Jonathan B. Berk, 2004. "Valuation and Return Dynamics of New Ventures," Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 1-35.
    4. Acs, Zoltan J & Audretsch, David B, 1988. "Innovation in Large and Small Firms: An Empirical Analysis," American Economic Review, American Economic Association, vol. 78(4), pages 678-690, September.
    5. Hanlon, Michelle & Rajgopal, Shivaram & Shevlin, Terry, 2003. "Are executive stock options associated with future earnings?," Journal of Accounting and Economics, Elsevier, vol. 36(1-3), pages 3-43, December.
    6. Danzon, Patricia M. & Nicholson, Sean & Pereira, Nuno Sousa, 2005. "Productivity in pharmaceutical-biotechnology R&D: the role of experience and alliances," Journal of Health Economics, Elsevier, vol. 24(2), pages 317-339, March.
    7. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    8. Scherer, F. M., 1983. "The propensity to patent," International Journal of Industrial Organization, Elsevier, vol. 1(1), pages 107-128, March.
    9. Quintana-Garci­a, Cristina & Benavides-Velasco, Carlos A., 2008. "Innovative competence, exploration and exploitation: The influence of technological diversification," Research Policy, Elsevier, vol. 37(3), pages 492-507, April.
    10. Jeffrey T. Macher, 2006. "Technological Development and the Boundaries of the Firm: A Knowledge-Based Examination in Semiconductor Manufacturing," Management Science, INFORMS, vol. 52(6), pages 826-843, June.
    11. Wesley M. Cohen & Richard R. Nelson & John P. Walsh, 2000. "Protecting Their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or Not)," NBER Working Papers 7552, National Bureau of Economic Research, Inc.
    12. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    13. Jinyoung Kim & Sangjoon John Lee & Gerald Marschke, 2009. "Inventor Productivity And Firm Size: Evidence From Panel Data On Inventors," Pacific Economic Review, Wiley Blackwell, vol. 14(4), pages 516-531, October.
    14. Eugene F. Fama & Kenneth R. French, 2008. "Dissecting Anomalies," Journal of Finance, American Finance Association, vol. 63(4), pages 1653-1678, August.
    15. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
    16. J. M. Plehn-Dujowich, 2009. "Firm size and types of innovation," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 18(3), pages 205-223.
    17. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    18. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    19. Shumway, Tyler, 1997. " The Delisting Bias in CRSP Data," Journal of Finance, American Finance Association, vol. 52(1), pages 327-340, March.
    20. repec:bla:joares:v:37:y:1999:i:2:p:353-385 is not listed on IDEAS
    21. Cockburn, Iain M. & Henderson, Rebecca M., 2001. "Scale and scope in drug development: unpacking the advantages of size in pharmaceutical research," Journal of Health Economics, Elsevier, vol. 20(6), pages 1033-1057, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:eee:corfin:v:44:y:2017:i:c:p:193-214 is not listed on IDEAS
    2. repec:eee:jbfina:v:85:y:2017:i:c:p:146-164 is not listed on IDEAS
    3. Chan, Konan & Lin, Yueh-hsiang & Wang, Yanzhi, 2015. "The information content of R&D reductions," Journal of Empirical Finance, Elsevier, vol. 34(C), pages 131-155.
    4. Chuluun, Tuugi & Graham, Carol, 2016. "Local happiness and firm behavior: Do firms in happy places invest more?," Journal of Economic Behavior & Organization, Elsevier, vol. 125(C), pages 41-56.
    5. Gao, Wenlian & Chou, Julia, 2015. "Innovation efficiency, global diversification, and firm value," Journal of Corporate Finance, Elsevier, vol. 30(C), pages 278-298.
    6. Mustafa Ciftci & Masako Darrough, 2015. "What Explains the Valuation Difference between Intangible-intensive Profit and Loss Firms?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 42(1-2), pages 138-166, January.
    7. Pierluigi Santosuosso, 2016. "What R&D Assets Say about Firm Profitability," International Business Research, Canadian Center of Science and Education, vol. 9(6), pages 64-71, June.
    8. Moutinho, Ricardo & Au-Yong-Oliveira, Manuel & Coelho, Arnaldo & Manso, José Pires, 2015. "Beyond the “Innovation's Black-Box”: Translating R&D outlays into employment and economic growth," Socio-Economic Planning Sciences, Elsevier, vol. 50(C), pages 45-58.
    9. Sara Amoroso, 2015. "Profits, R&D and labour: Breaking the law of diminishing returns to labour," JRC Working Papers on Corporate R&D and Innovation 2015-10, Joint Research Centre (Seville site).
    10. repec:eee:pacfin:v:43:y:2017:i:c:p:1-14 is not listed on IDEAS
    11. Mustafa Ciftci & Nan Zhou, 2016. "Capitalizing R&D expenses versus disclosing intangible information," Review of Quantitative Finance and Accounting, Springer, vol. 46(3), pages 661-689, April.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jaecon:v:52:y:2011:i:1:p:62-80. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/jae .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.