On the connection between R&D, selling expenditures and profitability in the pharmaceuticals industry revisited / created by Paul Sergius Koku

This paper extends P.S. Koku (2010, R&D expenditure and profitability in the pharmaceutical industry in the United States, Journal of Applied Managerial Accounting Research, 8, 36–43) in three important ways: (1) it expands selling expenses to include sales promotion and advertising expenses; (2) it examines media coverage as an additional explanatory variable of the stock market's reaction; (3) it more than doubles the sampling period which includes January 1980 through December 2001 instead of 1980 through 1989 in Koku (2010). The results confirm Koku (2010) and show that the market does not react significantly to information on innovations or innovative activities in the pharmaceutical industry (average abnormal returns are − 0.0064 with a t-value of − 0.2201). Furthermore, there is no relationship between excess abnormal returns and annual R&D budgets (coefficient is − 0.0010 with a t-value of − 1.02), and excess abnormal returns and annual advertising budgets (coefficient is 0.0001 with a t-value of 0.44). However, there is a significant relationship between the market's reaction and media coverage (coefficient is 0.00002 with a t-value of 2.17). This relationship has important managerial implications with regard to the content of new product information that managers in the industry release to the media.