Title: Evidence of R&d Effects on Cross Sectional Stock Returns
Abstract: INTRODUCTION There exist numerous studies exploring the topic of economic, market, or firm specific factors affecting stock returns. For example, the pioneering work of the Sharp-Lintner asset-pricing model (Sharpe 1964 & Lintner 1965) shows that expected returns on securities are a positive linear function of their market [beta]s, which can describe cross sectional expected returns. Market risk measurement ([beta]) is not the only variable to draw attention from researchers; other variables such as firm size and leverage also draw researchers' interests due to their ability to capture stock risks and explain variability of returns. Banz (1981)found that average returns on small size stocks are too high based on their [beta] estimates while average returns on large size stocks are too low. Bhandari (1988) proposes that leverage helps explain the cross section of average stock returns in a test that includes size as well as [beta]. Fama and French (1992) confirmed that size and book-to-market ratio could capture the cross-sectional stock returns together with [beta], leverage, and earnings-price ratios. It is interesting that in this study, market b seems to have no role in explaining average returns, while size and book-to-market equity capture cross-sectional variation in average stock returns. While the book to market phenomena are well accepted among researchers, Lev and Sougiannis (1999) examine book to market ratio effects as explained by RD Anagnostopoulou and Levis, 2008). Jain and Kini (2007) studied the effect of R&D investments on IPOs. This study is inconclusive in that a consistent relationship was demonstrated between R&D expenditures and a change in operating performance after the IPO. However, Jain and Kini provide evidence that R&D spending impacts IPO firms' ability to remain viable for a longer period of time. This study also shows that high R&D activity helps maintain the interest of the investment community and consequently its willingness to supply additional capital, regardless of initial profitability. Other current research examining R&D effects mainly focuses on firms' market value instead of operating performances or stock returns. For example, Bosworth (2001) investigated how R&D and intellectual property activities influence the market value of firms and found that R&D and patent activity are positively and significantly associated with market value. Hall (1993) investigated the stock market's valuation of R&D investment during the 1980's, finding that R&D could explain a fair amount of the variance of market value after controlling for firm size. Previous research brings to question how the market reacts to R&D investments, if R&D is an innovation and an intangible, yet viable input. Our study is designed to show evidence of the effect of a firm's R&D expenses on its subsequent stock returns. …
Publication Year: 2010
Publication Date: 2010-07-01
Language: en
Type: article
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Cited By Count: 4
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