Abstract

As technology becomes key success factor in the recent business environment, firms tend to concentrate their resources on research and development investment (R&D). In this paper, we examine the influence of R&D on the mean reverting property of return on asset (ROA). Furthermore, we examine whether R&D improves operational efficiency (e.g. new product development, quality enhancement) or productivity (e.g. improving cost efficiency). Our sample includes KOSPI listed firms over the 1995－2012 period. To analyze the mean reverting property of ROA, we compare the five－year ahead means of ROA across subsamples categorized by the initial level of ROA. We find mean reverting property of ROA on every subsample. Then, we examine whether R&D influences mean reverting property of ROA. We find negative relation between R&D and mean reversion speed of ROA when current level of ROA is high. However, R&D has propensity to boost ROA when current level of ROA is low. Lastly, we decompose ROA into profit margin (PM) and asset turnover (ATO), and examine which component of ROA contributes to the relation between R&D and mean reverting property of ROA. We find only profit margin increases the relation between R&D and mean reverting property of ROA. This is because R&D improves productivity and increases profitability. Our results contribute to managers and financial analysts by providing useful information for decisionmaking.

Keywords

• research and development
• mean reversion
• asset turn over
• profit margin

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