THE RESPONSE OF CAPITAL-MARKETS TO THE RESEARCH-AND-DEVELOPMENT PROCESS

We examine the response of the capital markets to research and develop ment (R&D) project announcements by firms along three stages of the R& D process: initiation, continuation, and new-product introduction. Usi ng event study methodology, conventional in financial economics and st rategic management, we examined 525 R&D project announcements over the 1977-1989 period. Our analysis suggests that investors respond favora bly to R&D announcements during the continuation and new-product intro duction stages. In the biotechnology industry, however, the greatest r esponse occurred in the initiation and continuation stages. Significan t gains in wealth were observed for relatively smaller firms, and in t he case of continuation announcements when R&D was viewed as a way of stimulating growth. After accounting for firm size and the effect of t he biotechnology industry, the frequency of R&D announcements by firms does not lead to greater stock market effects. Our data paint a pictu re of rational and sophisticated investors who understand and respond to R&D project announcements-a portrait that stands in stark contrast to the current criticisms of a myopic stock market.