The Impact of Lagged R&amp;D Expenses on Firm Performance: Empirical Evidence from the BSE Healthcare Index

Keyarani Mondal,Abhijit Sinha

doi:10.4038/cbj.v11i2.66

Abstract

The study finds the impact of lagged Research and Development expenditure on financial performance. The investigation analyses 69 pharmaceutical companies included in the BSE healthcare index (India) using secondary data for the period of 2008 to 2017. The two dependent variables which are considered separately are Return on Asset (ROA) and Return on Equity (ROE). The two estimated regression models show that both the lagged value and its quadratic term have a significant influence on the accounting-based measures. With regard to the control variables, size and leverage are found to influence negatively whereas liquidity poses a positive effect on these two accounting-based performance measures. The article contributes by highlighting that the true relationship between R&D and financial performance is represented by a U-shaped curve as evident in few other studies.

Highlights

Profitability of firms is a necessity and is the social responsibility of a business (Friedman, 1970)
If we look at the status of studies made in the Indian context, we see that there are a handful of research studies connecting Research and Development (R&D) and business performance and few others have looked some other areas
The authors are of the opinion that there are no studies in the context of pharmaceutical companies/any other industry in index in the Bombay Stock Exchange (India) which look into the effect of lagged R&D variable on performance

Summary

Introduction

Profitability of firms is a necessity and is the social responsibility of a business (Friedman, 1970). The contradiction in findings is seen from the studies of X.C. Zhao and Wu (2013) and Lu and Wang (2011) which find a negative impact of present expenditure on performance, but a positive and significant effect of one-year lagged expenditure. It is pertinent to mention here that with regard to the studies that determine the effect of R&D expenditure and performance, only a handful of research consider non-linear relationship (Beld, 2014; Wang, 2011; Fredrikson & Wikberg, 2015; Pantagakis et al, 2012; Parcharidis & Varsakelis, 2007).

Results

Conclusion