R&D Intensity and Future Stock Returns in Pharmaceutical Companies : A Panel Regression Analysis

Sammanfattning

Research and development (R&D) is central to value creation in pharmaceutical companies,where firms invest heavily in innovation under long and uncertain development processes.Because internal R&D is generally expensed under U.S. GAAP (Generally AcceptedAccounting Principles) rather than capitalized as an asset, its economic value may bedifficult to assess using conventional accounting measures. This thesis examines whetherR&D intensity can help explain future stock returns in publicly listed U.S. pharmaceuticaland biotechnology companies.The empirical analysis is based on a balanced panel of 20 firms over the period 2015 to 2024,resulting in 200 firm year observations. R&D intensity is measured as R&D expendituredivided by revenue, while future stock return is measured as the next year annual stockreturn. The study applies pooled ordinary least squares (OLS), heteroskedasticity robustOLS, firm fixed effects, firm and year fixed effects and a preferred specification with firmand year fixed effects and standard errors clustered at the firm level. Diagnostic tests,residual and influence plots and robustness checks are used to evaluate the reliability ofthe findings.The results provide moderate support for a positive relationship between R&D intensityand future stock returns. In the preferred specification, the coefficient on R&D intensity ispositive and statistically significant. However, the estimated economic magnitude is modest:a 10 percentage point increase in R&D intensity is associated with approximately 0.54percentage points higher future stock returns. The result is also sensitive to measurementchoices, especially when R&D intensity is redefined as R&D divided by total assets.Overall, the findings suggest that R&D intensity contains some predictive information,but the relationship should be interpreted as associational rather than causal.