The Effect of R&D Expenses on Earnings and Market Value

Abstract

The aim of this paper is to examine the effect that Research and Development (R&D) expenditures have on a company’s market value and earnings. Prior literature shows that R&D expenses have a positive impact on a firm’s market performance, as well as a positive impact on a firm’s earnings. The goal of this paper is not only to test the relation between R&D expenses and earnings and between R&D expenditures and market value, but also to prove that this relation changes as time passes. We show that while R&D expenses have an impact on market value in the short-run, their impact on earnings is stronger in the long-run. The sample consists of the companies listed in the North American Stock exchanges for the period 1993-2013 and for the industrial sector. Our results show a positive relation between R&D expenses and market value and between R&D expenses and earnings.

JEL Classification: M40, M41, M48