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R&D expenditures and earnings targets

Research output: Contribution to journalJournal article

Published

Journal publication date2009
JournalEuropean Accounting Review
Journal number1
Volume18
Number of pages26
Pages7-32
Original languageEnglish

Abstract

This paper examines whether firms cut R&D spending in response to short-term earnings pressures and how equity markets interpret such behaviour. Failure to report positive earnings and earnings growth increases the probability of a subsequent cut in R&D spending, while pressure to report positive earnings and earnings growth in the current period leads to contemporaneous cuts in R&D investment. On average, investors place less weight on earnings increases accompanied by unexpected cuts in R&D spending. However, the magnitude of the valuation discount varies according to the perceived reason for the cut and the importance of R&D investment as a driver of firm value.