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The association between research and development expenditure and firm performance: testing a life cycle hypothesis

Author

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  • Kamran Ahmed
  • Mohammed Jinan

Abstract

Although prior studies provide evidence that investment in research and development (R&D) expenditure enhances a firm's performance, very little evidence is available on the impact of a firm's life cycle stages on the association between R&D expenditures and firm performance. We classify firms into three-life cycle stages, namely, growth, mature and stagnant, and choose four-life cycle classification variables which are dividends, sales growth, capital expenditure and firm age. Using 769-firm-year observations over a period of 11-years in Australia, we find that the abnormal returns to unexpected expensed R&D amounts are significantly negative. Further, our results suggest that market reaction to expensed R&D is more negatively pronounced during the stagnant phase of a firm's life cycle, suggesting that the market perceives that firms have limited prospects to derive benefits arising out of expensed R&D expenditures. The results suggest that the relationship between performance and investment in R&D is not linear but is moderated by a firm's life cycle which should be taken into account when making policy that is based on stock-based performance.

Suggested Citation

  • Kamran Ahmed & Mohammed Jinan, 2011. "The association between research and development expenditure and firm performance: testing a life cycle hypothesis," International Journal of Accounting, Auditing and Performance Evaluation, Inderscience Enterprises Ltd, vol. 7(4), pages 267-286.
  • Handle: RePEc:ids:ijaape:v:7:y:2011:i:4:p:267-286
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