The relationship between R&D spending and shareholder returns in the computer industry

This paper explores the relationship between corporate R&D spending and growth in stockholder value. Corporate R&D, at the macroeconomic level, amounts to controllable, discriminate, elective spending with the management intent of creating future revenue and profit opportunities for the firm. It is firmly established that different industries tend to have different levels of R&D investments as a percentage of revenue. Researchers have used R&D expenditures and their various measurable effects as proxies for inventive output in attempts to correlate current R&D efforts to future results of the firms within an industry. Other studies have significantly related announced increases in firm R&D expenditures to positive, short term share price response. However, less research is available that relates R&D spending to the firms' actual future returns to shareholders. In this study, R&D as a percent of revenue at the firm level within the computer industry is correlated to the return to shareholders in later years. The years 1992-1994 are used to set the firms' routine R&D spending levels as a percent of revenues. Stockholder returns by firm are calculated over the years 1993-1997 and are compared to the firms' R&D spending levels in the previous years. The computer industry was chosen for this study because of its fast paced rate of technology change. The results indicate that there is a statistically significant negative relationship between routine R&D spending intensity and the actual stockholder returns experienced in succeeding years.