R&D intensity and abnormal stock returns

Technology is one of the most important drivers in the current economy. Many firms listed on the U.S. stock exchange conduct research and development (R&D) activities in order to gain competitive advantages. However, R&D activity negatively impacts the reported financial performance of a firm due to the current accounting rules. Under current U.S. accounting standards, intangible assets are not reported and R&D spending is expensed. Previous research has analyzed whether a potential positive relation between R&D expenditure and future abnormal stock returns exists. Some studies concluded R&D intensity is positively associated with abnormal returns, others concluded this was due to the interaction effect of other variables. This study provides new evidence, based on more recent observations, a positive relation between the level of R&D intensity of a firm and the abnormal stock return exists. A portfolio analysis is conducted to compare different measures of R&D intensity and to determine whether high R&D intensity firms experience higher abnormal returns. Companies with a high level of R&D intensity also tend to be more resilient in times of economic distress.