R&D expenditure volatility and stock return: Adjustment costs, earnings management or overinvestment-control?

A positive relation between the level of R&D expenditure and firm performance has been widely documented; however, changes to this level may incur adjustment costs, arise from earnings management, or reflect the actions of managers attempting to control technocrats overinvesting in value-decreasing projects. Using 4539 publicly listed US firms in the period 1980-2010, we find a significantly negative relation between the volatility of R&D expenditure and stock return. This relation is stronger for young, R&D-increased firms, and during recessionary periods. These results are consistent with managers manipulating earnings, but to smooth, rather than to improve, their firm’s reported performance