This paper examines how financial markets and participants price research and development (R&D) expenses in the short term, with a focus on U.S. technology and industrial firms. Though historically R&D has been known to drive long-term firm performance, in the short-term it is not clear to investors how R&D should impact valuation, as it can create uncertainty and potentially delayed returns. Using quarterly financials and stock price data, this study analyzes how changes in R&D intensity can impact stock price performance over intraday, interday, and quarterly time periods. Regressions were performed on the firm, sector, and pooled levels, with the S&P 500 used as a market control to isolate the causal effect at hand. Findings suggest that there is a negative relationship between R&D intensity and short-term share price movement. This effect was found to be the strongest and most significant in technology firms, with the intensity of the effect growing across longer time horizons. These results indicate that investors interpret R&D as a source of uncertainty in the short-term for technology firms.
Arjun Jhaveri (Thu,) studied this question.