An Examination of Long-Term Abnormal Stock Returns and Operating Performance Following R&D Increases


  • Allan C. Eberhart,

  • William F. Maxwell,

  • Akhtar R. Siddique

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    • Eberhart is from the Georgetown University, McDonough School of Business; Maxwell is from the University of Arizona, Eller College of Business; and Siddique is from the Office of the Comptroller of the Currency. We thank Rick Green and two anonymous referees for their comments. We also thank Ken Cavalluzzo, Jay Coughenour, Lisa Fairchild, Roberto Gutierrez, David Ikenberry, Prem Jain, Mike Cooper, Lee Pinkowitz, Guojun Wu, and seminar participants at the 2002 Financial Management Association Meetings, Georgetown, George Washington, the 2002 University of Maryland Finance Symposium (joint with the Financial Economics and Accounting Conference), and the Fall 2002 Washington Area Finance Association for their comments. We also thank Douglas Brunt and Marcelo Teixeira for their research assistance. Eberhart received support from a McDonough School of Business Summer Research Grant and from a Steers Faculty Research Fellowship. Eberhart and Maxwell received support from the Georgetown University Capital Markets Research Center. The views expressed are those of the authors and do not necessarily represent the views of the Office of the Comptroller of the Currency.


We examine a sample of 8,313 cases, between 1951 and 2001, where firms unexpectedly increase their research and development (R&D) expenditures by a significant amount. We find consistent evidence of a misreaction, as manifested in the significantly positive abnormal stock returns that our sample firms' shareholders experience following these increases. We also find consistent evidence that our sample firms experience significantly positive long-term abnormal operating performance following their R&D increases. Our findings suggest that R&D increases are beneficial investments, and that the market is slow to recognize the extent of this benefit (consistent with investor underreaction).