Do Analysts Underestimate Future Benefits of R&D?

Mustafa Ciftci

Abstract


This paper investigates whether future excess returns to R&D-intensive firms documented in prior literature is due to mispricing or compensation for additional risk. Prior research provides evidence consistent with the explanation that the positive association is compensation for additional risk associated with R&D (Chambers et al. 2002). I investigate another possibility: The future excess returns to R&D are correction for undervaluation in the prior periods. I first investigate financial analysts’ behavior about future benefits of R&D-intensive firms because financial analysts are one of the most important information intermediaries between investors and managers. Moreover, investor dependence on analyst information is greater in R&D-intensive firms (Barth et al., 2001). I find that analysts underestimate earnings long term growth in R&D-intensive firms and correct their underestimation in following years. I also find that investors are not aware of analysts’ underestimation of future benefits of R&D suggesting that investors are mislead by analysts long term forecasts.

Full Text: PDF DOI: 10.5539/ibr.v5n9p26

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International Business Research  ISSN 1913-9004 (Print), ISSN 1913-9012 (Online)

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