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R&D investment decisions of IPO firms and long-term future performance

Review of accounting & finance, 2018-01, Vol.17 (1), p.78-108 [Peer Reviewed Journal]

Emerald Publishing Limited ;Emerald Publishing Limited 2018 ;ISSN: 1475-7702 ;EISSN: 1758-7700 ;DOI: 10.1108/RAF-09-2016-0147

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  • Title:
    R&D investment decisions of IPO firms and long-term future performance
  • Author: Fedyk, Tatiana ; Khimich, Natalya
  • Subjects: Accounting ; Capital expenditures ; Capital markets ; Earnings management ; Financial performance ; Hypotheses ; Initial public offerings ; Investments ; Net income ; Product development ; Profitability ; Profits ; R&D ; Research & development ; Research & development expenditures ; Return on assets ; Valuation
  • Is Part Of: Review of accounting & finance, 2018-01, Vol.17 (1), p.78-108
  • Description: Purpose The purpose of this paper is to link valuation of different accounting items to research and development (R&D) investment decisions and investigate how suboptimal R&D choices during initial public offering (IPO) are linked to future operating and market underperformance. Design/methodology/approach For firms with substantial growth opportunities, accounting net income is a poor measure of the firm’s performance (Smith and Watts, 1992). Therefore, other metrics such as R&D intensity are used by investors to evaluate firms’ performance. This leads to a coexistence of two strategies: if earnings are the main value driver, firms tend to underinvest in R and if R&D expenditures are the main value driver, firms tend to overinvest in R&D. Findings The authors show that the R&D investment decision varies systematically with cross-sectional characteristics: firms that are at the growth stage, unprofitable or belong to science-driven industries are more likely to overinvest, while firms that are able to avoid losses by decreasing R&D expenditure are more likely to underinvest. Finally, they find that R&D overinvestment leads to future underperformance as evidenced by poor operating return on assets, lower product market share, higher frequency of delisting due to poor performance and negative abnormal stock returns. Originality/value While prior literature concentrates on R&D underinvestment as a tool of reporting higher net income, the authors demonstrate the existence of an alternative strategy used by many IPO firms – R&D overinvestment.
  • Publisher: Patrington: Emerald Publishing Limited
  • Language: English
  • Identifier: ISSN: 1475-7702
    EISSN: 1758-7700
    DOI: 10.1108/RAF-09-2016-0147
  • Source: ProQuest Central
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