English, Article edition: Effect of R&D investments on persistence of abnormal earnings Sharad C. Asthana; Yinqi Zhang

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Physical Description
  • article
Language
  • English

Edition details

Title
  • Effect of R&​D investments on persistence of abnormal earnings
Author
  • Sharad C. Asthana
  • Yinqi Zhang
Physical Description
  • article
Notes
  • Purpose – This paper sets out to test the effects of firms’ and industry's R&​D intensity on persistence of abnormal earnings. Design/​methodology/​approach – Ohlson's valuation model is used with pooled regressions along with Fama–Macbeth methodology on yearly regressions and partitioning on Herfindahl index to conduct the tests. Findings – It was found that firms’ and industries’ R&​D intensities are both positively correlated with persistence of abnormal earnings. The evidence suggests that the positive effect on earnings persistence caused by R&​D's effectiveness in mitigating competition dominates the negative effect brought by more risk from R&​D projects Practical implications – The fact that the firm's own R&​D investment leads to incremental earnings persistence beyond that of the industry suggests the importance of incorporating both industry and firm's R&​D intensity in earnings persistence. While industry R&​D investment leads to competition mitigation via creation of entry barriers, a firm's own investment in R&​D differentiates its products from those of its competitors, and thereby results in further competition mitigation by creating replacement barriers. Originality/​value – Finally, since R&​D intensity is correlated with earnings persistence, inclusion of R&​D intensity in future earnings persistence studies may lead to better model specification by reducing the problem of correlated omitted variables.
  • Competitors, Project management, Research and development
  • RePEc:eme:rafpps:v:5:y:2006:i:2:p:124-139
Language
  • English
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