R&D Expenditures and Subsequent Market Performance

Abstract: Currently, research on companies' market return following investments in research and development has been performed predominantly in the U.S. The objective of this research is, therefore, to examine the relationship between Swedish firms' investments in R&D and their subsequent market return. Finally, while adjusting for other potential sources of risk we find a considerable positive relationship between investments in R&D and market return. Our results suggest either a continuous mispricing by the market or a premium for the additional risk factor accompanied by R&D, leaning towards the former. The observed effect is smaller than those found in earlier research, indicating that perhaps the IFRS's perception of R&D expenditures is preferable to that of the U.S. GAAP.