THE WEALTH EFFECTS OF ANNOUNCEMENTS OF RESEARCH-AND-DEVELOPMENT EXPENDITURE INCREASES

We examine the effect of announcements of plans to increase R&D expenditures on the stock price of rival firms. We test two alternative hypotheses: the first-to-innovate hypothesis versus the free-rider of spillovers hypothesis. Analysis of 114 announcements of increases in R&D expenditures indicates that rival firms suffer a statistically significant negative abnormal return at announcement, which supports the first-to-innovate hypothesis. This result provides a rationale for the potentially costly voluntary disclosure of R&D expenditures. A cross-sectional analysis of the abnormal returns to rival firms reveals that a highly credible announcement has some spillover effects, and that the rival firm earns a much smaller but positive abnormal return. An important implication is that it is always strategically beneficial for the firm to disclose its future R&D plan.