While an extensive literature shows that R&D intensities and increases are positively related to firm performance, there is little research on the valuation of R&D reductions. This paper examines the long-term performance following significant R&D reductions. We find that, contrary to conventional wisdom, large R&D cuts are associated with significantly positive future stock returns. This return drift cannot be explained by a battery of asset pricing factors, including R&D intensities and R&D increases. We explore two potential economic motives behind R&D reductions?R&D spillover and firm life cycle. We show that operating performance deteriorates immediately before R&D reductions but exhibits no abnormal pattern afterward. While firm growth falls substantially and variability in profitability reduces, firms with low or declining investment opportunities outperform. These findings are inconsistent with the spillover hypothesis, but lend support to a firm life cycle story that firms attempt to resolve the overinvestment problem that arises as they move to a lower growth stage. We further show a significant decline in the cost of capital after R&D reductions; however, the market appears to underestimate the improvement in the cost of capital.