Revision of analysts' forecasts in response to changes in research and development expenditures

This study investigated the possibility that unexpected changes in expenditures on research and development might influence individuals' investing decisions. If the study can show that R & D spending changes are noticed, this information could be useful in analyzing the process involved in making market choices. Firms from several research-intensive industries were included and the industries were ranked according to the benefits derived over time from R & D spending. Firms that were members of highly ranked industries were expected to be noticed more readily by financial analysts when R & D spending patterns changed. Analysts' forecasts would be revised to a greater extent for these firms in which research has higher returns than for firms in industries in which research activity is not as profitable. If this contention is supported by the study, additional information would be available to individual firms and to government sources of R & D funding as to the ranking of industries in terms of research productivity. This knowledge would contribute to the effectiveness of resource allocation in generating useful innovations.; Separate tests were conducted on each industry group and for the sample as a whole to determine whether there exists a significant relationship between unexpected change in R & D spending and revision of analysts' forecasts. Unfortunately, this study was unable to demonstrate such a relationship for any of the industries or for the entire sample of firms. It is possible that some support for the hypothesized relationship might be gained through the use of a better source of data (to enhance the precision of measurement of the variables), larger sample sizes (to increase the degree to which the firms represent their industries), and by expanding the time period from a single year to several years. This study used 1996 as the base year, and this particular year could have been uninteresting to analysts because R & D spending changes were small or not unexpected.