Does the Stock Market Underreact to R&D Increases?

We examine a sample of 8,313 cases, between 1951 and 2001, where firms unexpectedly increase their research and development expenditures (Ramp;D) by a significant amount. We find consistent evidence that our sample firms are undervalued following their Ramp;D increases as manifested in the significantly positive long-term stock returns that our sample firms' shareholders experience. We also find consistent evidence that our sample firms have significantly positive long-term abnormal operating performance following their Ramp;D increases. Our findings suggest that Ramp;D increases are beneficial investments, and that the market is slow to recognize the extent of this benefit (consistent with investor underreaction)