Market Underestimation of the Implications of R&amp;D Increases for Future Earnings: The US Evidence

Ali, Ashiq; Ciftci, Mustafa; Cready, William M.

doi:10.1111/j.1468-5957.2012.02282.x

Cited by 44 publications

(30 citation statements)

References 51 publications

(132 reference statements)

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“…This finding is consistent with the evidence presented in Ali et. al (2012), which demonstrates that the market (both investors and analysts) underestimates the future earnings benefits of increases in innovation (R&D).…”

supporting

confidence: 94%

Which Competitive Efforts Lead to Future Abnormal Economic Rents? Using Accounting Ratios to Assess Competitive Advantage

Dickinson

Sommers

2012

Business Fin & Account

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Strategy theory suggests that firms can impede mean reversion of economic rents by employing competitive efforts, thereby impacting profitability, forecasting, and valuation. We use realized operating performance to establish which competitive effort proxies effectively protect rents. The inclusion of competitive advantage proxies improves future accounting return forecasts and several efforts generalize across industries including power over suppliers and the credible threat of expected retaliation (Porter, 1980). Traditional barriers‐to‐entry proxies (product differentiation, innovation, and capital requirements) do not result in higher profitability once risk‐ and industry‐adjusted. Finally, competitive efforts are not fully impounded into stock price, resulting in abnormal future returns.

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supporting

confidence: 94%

Which Competitive Efforts Lead to Future Abnormal Economic Rents? Using Accounting Ratios to Assess Competitive Advantage

Dickinson

Sommers

2012

Business Fin & Account

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“…Shleifer and Summers () also argue that acquirers can make risk‐free profit from targets that invest heavily in innovation. In a similar vein, Ali, Ciftci and Cready () show that shareholders underestimate the future benefits of R&D investments, making R&D‐intensive firms easy takeover targets. Takeover threats, in turn, may lead managers to focus more on short‐term profits rather than long‐term objectives.…”

Section: Theory and Hypothesesmentioning

confidence: 99%

CEO Incentives, Takeover Protection and Corporate Innovation

Mazouz

Zhao

2018

British J of Management

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This study examines the effects of CEO equity‐based compensation and anti‐takeover provisions on corporate innovation. Using a large sample of US firms over the period 1996–2014, we find that long‐term incentives have a stronger influence on innovation when combined with takeover threats. We also show that equity‐based compensation is more likely to spur innovation for small firms and firms in industries with high product market competition and innovation pressure. However, this effect is somewhat weaker in the presence of anti‐takeover provisions, suggesting that takeover protection encourages managerial shirking even when external competition is high. Finally, in addition to the existing evidence on the valuation effect of CEO equity‐based compensation, we identify innovation as an important channel through which managerial incentives can enhance firm value. Our results have potential implications for shareholders, managers and policymakers.

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“…Second, our study does not identify what types of earnings‐relevant information get impounded into stock prices through options trading. For example, information about the accruals and cash components of current earnings or information about current changes in research and development expenditure is highly predictive of future earnings and hence has implications for future stock returns (Sloan, 1996; and Ali et al, 2012). Options trading may reflect this information in stock prices earlier and hence reduce the stock return predictability of accruals or research and development information.…”

Section: Discussionmentioning

confidence: 99%

Options Trading and the Extent that Stock Prices Lead Future Earnings Information

Truong

2012

Business Fin & Account

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We examine the relation between options trading and the extent that stock prices lead future earnings information in the period 1998–2009. In a firm specific approach, we find that stock prices reflect future earnings information to a greater extent in firms’ post‐options‐listing period than in their pre‐options‐listing period. In a cross‐sectional setting, we find that stock prices of firms with readily available options trading reflect future earnings information more and earlier than those of firms without available options. In a sub‐sample containing only firms with listed options, we find that stock prices of firms with a high level of options trading volume reflect future earnings information more and earlier than those of firms with a low level of options trading volume. Findings in this study support the proposition that options trading results in more current information that is relevant for predicting future earnings being impounded into stock prices. Consistent with this proposition, we also document an inverse relation between options trading and the amount of new information provided by earnings announcements.

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Market Underestimation of the Implications of R&D Increases for Future Earnings: The US Evidence

Cited by 44 publications

References 51 publications

Which Competitive Efforts Lead to Future Abnormal Economic Rents? Using Accounting Ratios to Assess Competitive Advantage

Which Competitive Efforts Lead to Future Abnormal Economic Rents? Using Accounting Ratios to Assess Competitive Advantage

CEO Incentives, Takeover Protection and Corporate Innovation

Options Trading and the Extent that Stock Prices Lead Future Earnings Information

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