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Corporate R&D and Stock Returns: International Evidence

Published online by Cambridge University Press:  08 April 2021

Kewei Hou ,
Po-Hsuan Hsu Open the ORCID record for Po-Hsuan Hsu [Opens in a new window] ,
Shiheng Wang ,
Akiko Watanabe  and
Yan Xu
Kewei Hou
Affiliation:
The Ohio State University Fisher College of Businesshou.28@osu.edu
Po-Hsuan Hsu
Affiliation:
National Tsing Hua University College of Technology Managementpohsuanhsu@mx.nthu.edu.tw
Shiheng Wang
Affiliation:
The Hong Kong University of Science and Technology Business Schoolacwang@ust.hk
Akiko Watanabe
Affiliation:
University of Alberta School of Businessakiko.watanabe@ualberta.ca
Yan Xu*
Affiliation:
University of Hong Kong Business School
*
yanxuj@hku.hk (corresponding author)
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Abstract

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Firms with higher R&D intensity subsequently experience higher stock returns in international stock markets, highlighting the role of intangible investments in international asset pricing. The R&D effect is stronger in countries where growth option risk is more likely priced, but is unrelated to country characteristics representing market sentiments and limits-of-arbitrage. Moreover, we find that R&D intensity is associated with higher future operating performance, return volatility, and default likelihood. Our evidence suggests that the cross sectional relation between R&D intensity and stock returns is more likely attributable to risk premium than to mispricing.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 4 , June 2022 , pp. 1377 - 1408
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted re-use, distribution, and reproduction in any medium, provided the original work is properly cited.
Copyright
© The Author(s), 2021. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank Rui Albuquerque, Hiroyuki Aman, Geert Bekaert, Jan Bena, Yuk Ying Chang, Lauren Cohen, Bernard Dumas, Ron Giammarino, Jarrad Harford (the editor), Robert Hodrick, Dana Kiku, Howard Kung, Cheng-Few Lee, Xiaoji Lin, Alexander Ljungqvist, Christian Lundblad, David Ng, Dimitris Papanikolaou, Gordon Phillips, David Reeb, Jay Ritter, Mark Schankerman, Clemens Sialm, Akhtar Siddique (the referee), Stephan Siegel, René M. Stulz, Hanwen Sun, Kevin Tseng, Mika Vaihekoski, Rossen Valkanov, Siri Valseth, Wei Xiong, Holly Yang, Tong Yao, Motohiro Yogo, and Shih-Ti Yu, and the conference and seminar participants at Development Bank of Japan, Hitotsubashi University, 2016 Nippon (Japan) Finance Association Meeting, National Chiao-Tung University, National Tsing Hua University, Fudan University, and Shanghai University of Finance and Economics for their comments and suggestions. We are grateful to Kai Yan for his research assistance and especially thank Masahiro Watanabe for his great help. Hsu and Xu acknowledge the support from the General Research Fund sponsored by the Research Grants Council in Hong Kong (Refs. 17502514 and 17511716). Hsu acknowledges financial support from Ministry of Science and Technology and Ministry of Education in Taiwan (MOST108-2410-H-007-099-MY2, MOST109-2628-H-007-001-MY4, MOST109-2634-F-002-045, MOE109J0321Q2, and MOE109L900202). Watanabe acknowledges financial support from Social Sciences and Humanities Research Council of Canada (SSHRC).

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