Decreasing Returns to Shareholders From R&D Spending in the Computer Industry

This article explores the relationship between stockholder value changes and corporate research and development (R&D) spending in the computer industry. Researchers attempted to tie R&D expenditures and its various measurable effects to future results of the firms within an industry, with mixed results. They identify a positive, short-term relationship between stockholder share price movements and firm announcements of plans to increase R&D expenditures. They also show that industries with higher R&D intensities grow faster than those with low R&D intensities. However, little research is available that effectively relates R&D expenditures to future share price performance of the firms within an industry over a period of years. In this study, computer firm R&D intensity is correlated to future stockholder compound annual returns over both 1- and 5-year periods, based on research activity and financial results from 1992 to 1997. Results indicate a statistically significant negative relationship between routine R&D spending intensity and actual stockholder returns over both the 1- and 5-year periods studied. This work suggests there are diminishing returns to increased R&D spending in the computer industry and that computer firms are overspending on R&D at the expense of their stockholders.