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Excess Returns to R&D-Intensive Firms

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  • Dennis Chambers
  • Ross Jennings
  • Robert B. Thompson

Abstract

Recent studies indicate that both current R&D investment levels and current or recent changes in R&D investment are positively associated with subsequent excess (risk-adjusted) stock returns. The tentative explanation offered for these results is that shares of R&D-intensive firms are “mispriced” because investors fail to see through earnings distortions caused by conservative accounting for R&D costs. However, an alternative explanation is that conventional controls for risk do not completely capture the riskiness of R&D-intensive firms, causing measured excess returns for these firms to be biased upward. This study provides evidence useful for distinguishing between the mispricing and risk explanations for R&D-related excess returns. Overall, our empirical results suggest that the positive association between R&D investment levels and excess returns is more likely to result from failure to control adequately for risk than from mispricing. On the other hand, our results do not rule out the possibility of a second source of excess returns that are due to mispricing and that are associated with changes in the level of R&D investment.

Suggested Citation

  • Dennis Chambers & Ross Jennings & Robert B. Thompson, 2002. "Excess Returns to R&D-Intensive Firms," Review of Accounting Studies, Springer, vol. 7(2), pages 133-158, June.
    • Handle: RePEc:spr:reaccs:v:7:y:2002:i:2:d:10.1023_a:1020217817156
    DOI: 10.1023/A:1020217817156
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    References listed on IDEAS

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    Cited by:

    1. Evgeny Lyandres & Le Sun & Lu Zhang, 2005. "Investment-Based Underperformance Following Seasoned Equity Offerings," NBER Working Papers 11459, National Bureau of Economic Research, Inc.
    2. Wang, Fangjun & Xie, Jiayue & Anderson, Mark & Li, Jiyuan & Sun, Junqin, 2025. "Managerial ability and R&D spending stickiness: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 93(C).

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