Long-Term Abnormal Returns Following R&D Increases
Source: Eberhart, Maxwell & Siddique (2004) · The Journal of Finance · DOI: 10.1111/j.1540-6261.2004.00644.x
TL;DR
Examining 8,313 cases of firms that unexpectedly and significantly increase R&D, the authors find significantly positive long-term abnormal stock returns and improved operating performance afterward. The market under-reacts to R&D increases, treating an investment in future growth as a current expense.
What anomaly it documents
Predictor: a significant unexpected increase in R&D spending.
Shape: multi-year drift; accompanied by improving operating performance.
OSAP predictor: SurpriseRD.
How to construct it
Sorting variable: indicator/magnitude of an unexpected R&D increase (vs prior trend/industry).
Universe: R&D-reporting firms.
Portfolio formation: event portfolio of R&D-increasing firms.
Long / short: long firms with surprise R&D increases.
Weighting: equal-weighted event study.
Rebalancing: event-time, multi-year holding.
Evidence and replication
Period
Notes
Source
IS (1951–2001)
positive long-run abnormal returns after R&D surges
this paper
OOS (post-2004)
part of intangibles-mispricing evidence
post-publication
OSAP (SurpriseRD)
replicates
Chen & Zimmermann 2022
Why it might work
Intangibles mis-accounting: expensing R&D depresses current earnings/book, so the market underprices the growth option.
Underreaction: benefits of R&D show up slowly.
Limitations and risks
Sector concentration: clusters in tech/pharma.
Event basis: capacity limited to R&D-increasing firms.
Long-horizon inference: benchmark-sensitive.
Key references
Eberhart, A., Maxwell, W. & Siddique, A. (2004) — An Examination of Long-Term Abnormal Stock Returns and Operating Performance Following R&D Increases — JF — DOI: 10.1111/j.1540-6261.2004.00644.x
Provenance: generated from the paper's abstract and metadata, not full text; sample periods and replication notes are indicative — verify against the source.
