The examination of R&D impact on firm value

Abstract

The literature suggests a positive relation between R&D changes and future stock returns. We re-examine this result by focusing on firms with R&D decreases. We find that firms with large decreases in R&D intensity generate a significantly positive abnormal stock return in the long-run. This positive abnormal return cannot be explained by previously documented determinants of cross-section returns, such as size, book-to-market ratio, momentum, accruals, asset growth and net share issuance. Further tests suggest that this positive abnormal return is not driven by return predictability of R&D level, large R&D increase or repurchase announcement. We examine three hypotheses, R&D spillover, managerial myopia and overinvestment. We find no evidence to support either the spillover or myopia explanation. Our results are most consistent with the overinvestment hypothesis. Firms decrease their cost of capital after R&D decreases. Those Firms with low growth opportunities generate higher future returns than their R&D decrease counterparts. Firms with declining cost of capital also outperform.