R&D Increases and Long-Term Performance of Rivals

We examine how a firm's research and development (R&D) increases affect its intra-industry competitors in the long run. Consistent with the R&D spillover hypothesis, when a firm unexpectedly increases its R&D spending, its intra-industry competitors experience improvements in operating performance and analyst forecast revisions and earn positive abnormal stock returns in the long run. The industry concentration, which is related to the firm's strategic reaction, is crucial in determining the magnitude of the R&D spillover effect.