TY  - JOUR
AB  - Purpose– This paper sets out to test the effects of firms’ and industry's R&D intensity on persistence of abnormal earnings.Design/methodology/approach– Ohlson's valuation model is used with pooled regressions along with Fama–Macbeth methodology on yearly regressions and partitioning on Herfindahl index to conduct the tests.Findings– It was found that firms’ and industries’ R&D intensities are both positively correlated with persistence of abnormal earnings. The evidence suggests that the positive effect on earnings persistence caused by R&D's effectiveness in mitigating competition dominates the negative effect brought by more risk from R&D projectsPractical implications– The fact that the firm's own R&D investment leads to incremental earnings persistence beyond that of the industry suggests the importance of incorporating both industry and firm's R&D intensity in earnings persistence. While industry R&D investment leads to competition mitigation via creation of entry barriers, a firm's own investment in R&D differentiates its products from those of its competitors, and thereby results in further competition mitigation by creating replacement barriers.Originality/value– Finally, since R&D intensity is correlated with earnings persistence, inclusion of R&D intensity in future earnings persistence studies may lead to better model specification by reducing the problem of correlated omitted variables.
VL  - 5
IS  - 2
SN  - 1475-7702
DO  - 10.1108/14757700610668967
UR  - https://doi.org/10.1108/14757700610668967
AU  - Asthana Sharad C.
AU  - Zhang Yinqi
PY  - 2006
Y1  - 2006/01/01
TI  - Effect of R&D investments on persistence of abnormal earnings
T2  - Review of Accounting and Finance
PB  - Emerald Group Publishing Limited
SP  - 124
EP  - 139
Y2  - 2024/04/23
ER  -