The changing implications of research and development expenditures for future profitability

We document strong evidence of a declining relation between R&D and future profitability, which coincides with a number of important economic changes, including a significant increase in R&D spending. We identify several contributors to this decline, including changes in the nature and riski...

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Bibliographic Details
Published inReview of accounting studies Vol. 25; no. 2; pp. 405 - 437
Main Authors Curtis, Asher, McVay, Sarah, Toynbee, Sara
Format Journal Article
LanguageEnglish
Published New York Springer US 01.06.2020
Springer Nature B.V
Subjects
Accounting/Auditing
Business and Management
Corporate Finance
Profitability
Public Finance
R&D
Research & development
Research & development expenditures
R&D
M41
Earnings implications
Forecasting
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Summary:We document strong evidence of a declining relation between R&D and future profitability, which coincides with a number of important economic changes, including a significant increase in R&D spending. We identify several contributors to this decline, including changes in the nature and riskiness of R&D projects and a shift in the types of firms undertaking R&D in our sample. We also demonstrate variation in the implications of R&D for future profitability, consistent with diminishing marginal returns to R&D investments. Overall, our evidence suggests that, in earlier periods, investments in R&D offered high returns in U.S. public firms but that in more recent times these returns have stabilized at lower levels. Our study offers important insights for financial statement users, managers, and researchers.
ISSN:1380-6653
1573-7136
DOI:10.1007/s11142-019-09528-6