The Effect of Firm Life Cycle on the Relationship between R&D Expenditures and Future Performance, Earnings Uncertainty, and Sustainable Growth

Abstract

R&D investment can reduce costs through efficient production technology, which has a positive (+) impact on future performance. On the other hand, R&D investment has uncertainty due to characteristics such as time lag, high cost and non-appropriability. We examine whether the effects of R&D expenditures on future performance and earnings uncertainty are different according to firm life cycle, which reflects the differences in the environment, circumstances, and strategy of the firm. Investors assess sustainable growth potential of the enterprise in the capital market, reflecting the future performance and the uncertainty of the firm. This implies that R&D investment can affect the capital market through investors’ future expectations for sustainable growth of the company. We also examine the differential effects of R&D expenditures on market response by the firm life cycle. The test results show that firm life cycle differentially affects the relation between R&D expenditures and future performance and uncertainty. Further, the market response varies over the firm life cycle. Our results provide suggestions that R&D investments should be made properly considering the environment and circumstances of the firm. The finding that R&D expenditures differently affect future performance, uncertainty, and sustainable growth potential according to the firm life cycle is expected to help managers make decisions about R&D investment.