The Effects of R&D and Advertising on Firm Value: An Examination of Manufacturing and Nonmanufacturing Firms

Abstract

Firm spending on innovation and marketing, as measured by research and development (R&D) and advertising expenses, respectively, are expected to yield positive returns in terms of share price performance. Given resource limitations, firms prioritize the quantum of their investments in R&D and advertising vis-a/spl grave/-vis other investments. We examine the relationship between firm performance and the intensity of their investments in R&D and advertising over an extended period covering 40 years and 15 039 firm-years. Our findings are consistent with the resource-based literature. Specifically, we find that intensive investment in R&D contributes positively to the one-year stock market performances of manufacturing firms but not for nonmanufacturing firms. We also find that intensive investment in advertising contributes positively to the one-year stock market performances of nonmanufacturing firms. For the three-year stock market performance, in addition to the findings of the one-year period, we find inconclusive evidence that manufacturing firms benefit from investment in advertising. The interactions of R&D and advertising intensities are insignificant in explaining the stock market performance of the firms except for the three-year horizon for nonmanufacturing firms, which is significantly negative. Consistent with the resource-based literature, this implies that firm performances are diluted when they invest their resources in activities outside their core competence.