Hostname: page-component-7479d7b7d-jwnkl Total loading time: 0 Render date: 2024-07-08T08:16:15.511Z Has data issue: false hasContentIssue false

R&D Spillover Effects and Firm Performance Following R&D Increases

Published online by Cambridge University Press:  29 November 2013

Sheng-Syan Chen
Affiliation:
sschenfn@ntu.edu.tw, College of Management, National Taiwan University, No 1, Sec 4, Roosevelt Rd, Taipei, Taiwan
Yan-Shing Chen
Affiliation:
yanshing@ntu.edu.tw, College of Management, National Taiwan University, No 1, Sec 4, Roosevelt Rd, Taipei, Taiwan
Woan-lih Liang
Affiliation:
wlliang@nctu.edu.tw, Graduate Institute of Finance, National Chiao Tung University, 1001 University Rd, Hsinchu, Taiwan.
Yanzhi Wang
Affiliation:
yzwang@ntu.edu.tw, College of Management, National Taiwan University, No 1, Sec 4, Roosevelt Rd, Taipei, Taiwan

Abstract

We examine how research and development (R&D) incoming spillovers affect long-run firm performance following firms’ R&D increases. We use a stochastic frontier production method to capture R&D incoming spillover effects. Firms reaping more benefits from R&D investment made by other firms experience more improvement in profitability and more favorable long-run stock performance in the post-R&D-increase period. Firms with higher levels of R&D incoming spillovers recruit more key employees from other firms, suggesting that obtaining know-how through hiring is an important source of incoming spillovers. The evidence also shows that firms experiencing more R&D outgoing spillover effects tend to underinvest in R&D.

Type
Research Articles
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2013 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Agarwal, R.; Echambadi, R.; Franco, A. M.; and Sarkar, M. B.. “Knowledge Transfer Through Congenital Learning: Spin-Out Generation, Growth and Survival.” Academy of Management Journal, 47 (2004), 501522.CrossRefGoogle Scholar
Agarwal, R.; Ganco, M.; and Ziedonis, R. H.. “Reputations for Toughness in Patent Enforcement: Implications for Knowledge Spillovers via Inventor Mobility.” Strategic Management Journal, 30 (2009), 13491374.CrossRefGoogle Scholar
Aigner, D.; Lovell, C. A. K.; and Schmidt, P.. “Formulation and Estimation of Stochastic Frontier Production Function Models.” Journal of Econometrics, 6 (1977), 2137.CrossRefGoogle Scholar
Alcácer, J., and Chung, W.. “Location Strategies and Knowledge Spillovers.” Management Science, 53 (2007), 760776.CrossRefGoogle Scholar
Arrow, K. “Economic Welfare and the Allocation of Resources for Invention.” In The Rate and Direction of Inventive Activity: Economic and Social Factors, Nelson, R. R., ed. Princeton, NJ: Princeton University Press (1962), 609625.CrossRefGoogle Scholar
Barber, B. M., and Lyon, J. D.. “Detecting Abnormal Operating Performance: The Empirical Power and Specification of Test Statistics.” Journal of Financial Economics, 41 (1996), 359399.CrossRefGoogle Scholar
Barberis, N.; Shleifer, A.; and Vishny, R.. “A Model of Investor Sentiment.” Journal of Financial Economics, 49 (1998), 307343.CrossRefGoogle Scholar
Battese, G. E., and Coelli, T. J.. “Prediction of Firm-Level Technological Efficiencies with a Generalized Frontier Production Function and Panel Data.” Journal of Econometrics, 38 (1988), 387399.CrossRefGoogle Scholar
Battese, G. E., and Coelli, T. J.. “Frontier Production Functions, Technical Efficiency and Panel Data: With Application to Paddy Farmers in India.” Journal of Productivity Analysis, 3 (1992), 153169.CrossRefGoogle Scholar
Berk, J. B.; Green, R. C.; and Naik, V.. “Valuation and Return Dynamics of New Ventures.” Review of Financial Studies, 17 (2004), 135.CrossRefGoogle Scholar
Bernstein, J. I., and Nadiri, M. I.. “Interindustry R&D Spillovers, Rates of Return, and Production in High-Tech Industries.” American Economic Review Papers and Proceedings, 78 (1988), 429434.Google Scholar
Carhart, M. M. “On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 5782.CrossRefGoogle Scholar
Cassiman, B., and Veugelers, R.. “R&D Cooperation and Spillovers: Some Empirical Evidence from Belgium.” American Economic Review, 92 (2002), 11691184.CrossRefGoogle Scholar
Chan, K.; Ikenberry, D.; and Lee, I.. “Economic Sources of Gain in Share Repurchases.” Journal of Financial and Quantitative Analysis, 39 (2004), 461479.CrossRefGoogle Scholar
Chan, L. K. C.; Lakonishok, J.; and Sougiannis, T.. “The Stock Market Valuation of Research and Development Expenditures.” Journal of Finance, 56 (2001), 24312456.CrossRefGoogle Scholar
Chan, S. H.; Martin, J. D.; and Kensinger, J. W.. “Corporate Research and Development Expenditures and Share Value.” Journal of Financial Economics, 26 (1990), 255276.CrossRefGoogle Scholar
Chen, S. S.; Ho, L. C.; and Shih, Y. C.. “Intra-Industry Effects of Corporate Capital InvestmentAnnouncements.” Financial Management, 36 (2007), 125145.CrossRefGoogle Scholar
Chopra, N.; Lakonishok, J.; and Ritter, J. R.. “Measuring Abnormal Returns: Do Stocks Overreact?Journal of Financial Economics, 31 (1992), 235268.CrossRefGoogle Scholar
Christensen, L. R.; Jorgenson, D. W.; and Lau, L. J.. “Transcendental Logarithmic Production Frontiers.” Review of Economics and Statistics, 55 (1973), 2845.CrossRefGoogle Scholar
Cohen, W. M., and Levinthal, D. A.. “Innovation and Learning: The Two Faces of R&D.” Economic Journal, 99 (1989), 569596.CrossRefGoogle Scholar
Cooper, M. J.; Gulen, H.; and Schill, M. J.. “Asset Growth and the Cross-Section of Stock Returns.” Journal of Finance, 63 (2008), 16091651.CrossRefGoogle Scholar
Daniel, K., and Titman, S.. “Evidence on the Characteristics of Cross Sectional Variation in Stock Returns.” Journal of Finance, 52 (1997), 133.CrossRefGoogle Scholar
Denis, D. J., and Sarin, A.. “Is the Market Surprised by Poor Earnings Realizations Following Seasoned Equity Offerings?Journal of Financial and Quantitative Analysis, 36 (2001), 169193.CrossRefGoogle Scholar
Eberhart, A. C.; Maxwell, W. F.; and Siddique, A. R.. “An Examination of Long-Term Abnormal Stock Returns and Operating Performance Following R&D Increases.” Journal of Finance, 59 (2004), 623650.CrossRefGoogle Scholar
Eberhart, A. C.; Maxwell, W. F.; and Siddique, A. R.. “A Reexamination of the Tradeoff between the Future Benefit and Riskiness of R&D Increases.” Journal of Accounting Research, 46 (2008), 2752.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “The Cross-Section of Expected Stock Returns.” Journal of Finance, 47 (1992), 427465.Google Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 356.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Forecasting Profitability and Earnings.” Journal of Business, 73 (2000), 161175.CrossRefGoogle Scholar
Fama, E. F., and MacBeth, J. D.. “Risk, Return, and Equilibrium: Empirical Tests.” Journal of Political Economy, 81 (1973), 607636.CrossRefGoogle Scholar
Feinberg, S. E., and Gupta, A. K.. “Knowledge Spillovers and the Assignment of R&D Responsibilities to Foreign Subsidiaries.” Strategic Management Journal, 25 (2004), 823845.CrossRefGoogle Scholar
Franco, C., and Gussoni, M.. “Firms’ R&D Cooperation Strategies: The Partner Choice.” Working Paper, University of Pisa (2010).Google Scholar
Geroski, P.; Machin, S.; and Reenan, J. V.. “The Profitability of Innovating Firms.” RAND Journal of Economics, 24 (1993), 198211.CrossRefGoogle Scholar
Green, R. C.; Hollifield, B.; and Schürhoff, N.. “Financial Intermediation and the Costs of Trading in an Opaque Market.” Review of Financial Studies, 20 (2007), 275314.CrossRefGoogle Scholar
Griliches, Z. “Issues in Assessing the Contribution of Research and Development of Productivity Growth.” Bell Journal of Economics, 10 (1979), 92116.CrossRefGoogle Scholar
Griliches, Z. “The Search for R&D Spillovers.” Scandinavian Journal of Economics, 94 (1992), Supplement, 2947.CrossRefGoogle Scholar
Habib, M. A., and Ljungqvist, A.. “Firm Value and Managerial Incentives: A Stochastic Frontier Approach.” Journal of Business, 78 (2005), 20532094.CrossRefGoogle Scholar
Hanel, P., and St-Pierre, A.. “Effects of R&D Spillovers on the Profitability of Firms.” Review of Industrial Organization, 20 (2002), 305322.CrossRefGoogle Scholar
Henderson, R., and Cockburn, I.. “Scale, Scope, and Spillovers: The Determinants of Research Productivity in Drug Discovery.” RAND Journal of Economics, 27 (1996), 3259.CrossRefGoogle ScholarPubMed
Hirshleifer, D.Investor Psychology and Asset Pricing.” Journal of Finance, 56 (2001), 15331598.Google Scholar
Hong, H., and Stein, J. C.. “A Unified Theory of Underreaction, Momentum Trading and Overreaction in Asset Markets.” Journal of Finance, 54 (1999), 21432184.CrossRefGoogle Scholar
Hunt-McCool, J.; Koh, S. C.; and Francis, B. B.. “Testing for Deliberate Underpricing in theIPO Premarket: A Stochastic Frontier Approach.” Review of Financial Studies, 9 (1996), 12511269.CrossRefGoogle Scholar
Jaffe, A. B. “Technological Opportunity and Spillovers of R&D: Evidence from Firms’ Patents, Profits, and Market Value.” American Economic Review, 76 (1986), 9841001.Google Scholar
Jaffe, A. B.; Trajtenberg, M.; and Henderson, R.. “Geographic Localization of Knowledge Spillovers as Evidenced by Patent Citations.” Quarterly Journal of Economics, 108 (1993), 577598.CrossRefGoogle Scholar
Jegadeesh, N., and Titman, S.. “Returns to Buying Winners and Selling Losers: Implication for Stock Market Efficiency.” Journal of Finance, 48 (1993), 6591.CrossRefGoogle Scholar
Jones, C. I., and Williams, J. C.. “Measuring the Social Return to R&D.” Quarterly Journal of Economics, 113 (1998), 11191135.CrossRefGoogle Scholar
Jorgenson, D. W., and Stiroh, K. J.. “Information Technology and Growth.” American Economic Review Papers and Proceedings, 89 (1999), 109115.CrossRefGoogle Scholar
Krugman, P.Increasing Returns and Economic Geography.” Journal of Political Economy, 99 (1991), 483499.CrossRefGoogle Scholar
Lakonishok, J.; Shleifer, A.; and Vishny, R. W.. “Contrarian Investment, Extrapolation, and Risk.” Journal of Finance, 49 (1994), 15411578.CrossRefGoogle Scholar
Lang, L. H. P., and Stulz, R. M.. “Contagion and Competitive Intra-Industry Effects of Bankruptcy Announcements.” Journal of Financial Economics, 32 (1992), 4560.CrossRefGoogle Scholar
La Porta, R.; Lakonishok, J.; Shleifer, A.; and Vishny, R.. “Good News for Value Stocks: Further Evidence on Market Efficiency.” Journal of Finance, 52 (1997), 859874.CrossRefGoogle Scholar
Levin, R. C.; Klevorick, A. K.; Nelson, R. R.; Winter, S. G.; Gilbert, R.; and Griliches, Z.. “Appropriating the Returns from Industrial Research and Development.” Brookings Papers on Economic Activity, 3 (1987), 783831.CrossRefGoogle Scholar
Lie, E. “Detecting Abnormal Operating Performance: Revisited.” Financial Management, 30 (2001), 7791.CrossRefGoogle Scholar
Lyon, J. D.; Barber, B. M.; and Tsai, C. L.. “Improved Methods for Tests of Long-Run Abnormal Stock Returns.” Journal of Finance, 54 (1999), 165201.CrossRefGoogle Scholar
Massa, M.; Rehman, Z.; and Vermaelen, T.. “Mimicking Repurchases.” Journal of Financial Economics, 84 (2007), 624666.CrossRefGoogle Scholar
McEvily, S. K., and Chakravarthy, B.. “The Persistence of Knowledge-Based Advantage: An Empirical Test for Product Performance and Technological Knowledge.” Strategic Management Journal, 23 (2002), 285305.CrossRefGoogle Scholar
Megna, P., and Mueller, D. C.. “Profit Rates and Intangible Capital.” Review of Economics and Statistics, 73 (1991), 632642.CrossRefGoogle Scholar
Newey, W. K., and West, K. D.. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703708.CrossRefGoogle Scholar
Pastor, L., and Stambaugh, R. F.. “Liquidity Risk and Expected Stock Returns.” Journal of Political Economy, 111 (2003), 642685.CrossRefGoogle Scholar
Pontiff, J., and Woodgate, A.. “Share Issuance and Cross-Sectional Returns.” Journal of Finance, 63 (2008), 921945.CrossRefGoogle Scholar
Sanna-Randaccio, F., and Veugelers, R.. “Multinational Knowledge Spillover with Decentralized R&D: A Game-Theoretic Approach.” Journal of International Business Studies, 38 (2007), 4763.CrossRefGoogle Scholar
Shumway, T. “The Delisting Bias in CRSP Data.” Journal of Finance, 52 (1997), 327340.CrossRefGoogle Scholar
Shumway, T., and Warther, V. A.. “The Delisting Bias in CRSP’s Nasdaq Data and Its Implications for the Size Effect.” Journal of Finance, 54 (1999), 23612379.CrossRefGoogle Scholar
Sloan, R. G. “Do Stock Prices Fully Reflect Information in Accruals and Cash Flows about Future Earnings?Accounting Review, 71 (1996), 289315.Google Scholar
Stiroh, K. J. “Information Technology and the U.S. Productivity Revival: What Do the Industry Data Say?American Economic Review, 92 (2002), 15591576.CrossRefGoogle Scholar
Szewczyk, S. H.; Tsetsekos, G. P.; and Zantout, Z.. “The Valuation of Corporate R&D Expenditures: Evidence from Investment Opportunities and Free Cash Flow.” Financial Management, 25 (1996), 105110.CrossRefGoogle Scholar
Titman, S.; Wei, K. C. J.; and Xie, F.. “Capital Investments and Stock Returns.” Journal of Financial and Quantitative Analysis, 39 (2004), 677700.CrossRefGoogle Scholar
Zantout, Z. Z., and Tsetsekos, G. P.. “The Wealth Effects of Announcements of R&D Expenditure Increases.” Journal of Financial Research, 17 (1994), 205216.CrossRefGoogle Scholar