R&D and performance persistence: Evidence from the United Kingdom

There is compelling evidence from both the United States and United Kingdom suggesting that R&D investment is positively related to operating and/or market performance. This study extends prior research on R&D and valuation by further examining the sustainability or persistence of operating growth and market performance as a result of R&D investments.We use a large dataset of U.K. companies during the period 1990–2003 and our findings confirm the relation between R&D intensity and consistent growth in Sales and Gross Income, but only in the cases when a firm needs to engage in R&D activity because of the industry in which it operates. Moreover, our evidence indicates not only a positive relation between R&D intensity and subsequent risk-adjusted excess returns among firms that engage in R&D as testified by prior literature, but we also show that R&D intensity improves persistence in excess stock returns: the highest R&D-intensity firms are found to earn higher risk-adjusted excess returns more consistently than the sample median return, compared to lower R&D-intensity firms, as well as firms with no R&D. We interpret this finding as consistent with at least some form of market mispricing.     

The Impact of Corporate Diversification on the Long-Term Stock Return of R&D Increase Announcements

Prior studies have tested the long-term performance of research and development (R&D) spending, but the results are inconclusive. This study extends this line of research and explores the impact of corporate diversification on the long-term stock returns on R&D increase announcements. After controlling for the important variables in explaining the performance of R&D increases, a significantly negative association is found between the degree of corporate diversification and the long-run stock returns on R&D increase announcements. This result suggests that the costs of corporate diversification dominate the benefits regarding corporate diversification, and highlight the important effect a firm's diversification strategy has on the market valuation of R&D innovation.     

The valuation of R&D expenditures in Japan

The difficulty to measure the long‐term benefits of R&D expenditures and the distortions induced by R&D accounting suggest that R&D‐intensive firms could be undervalued. Using several methods commonly applied to detect the abnormal returns associated with mispricing, we find little evidence that the value of R&D investments has been underestimated in the Japanese stock market. Given that R&D accounting rules in Japan are similar to those in United States, the results appear to reject the hypothesis that accounting biases are the cause of the undervaluation of R&D investments observed in the United States.     

The Stock Market Valuation of Research and Development Expenditures

We examine whether stock prices fully value firms' intangible assets, specifically research and development (R&D). Under current U.S. accounting standards, financial statements do not report intangible assets and R&D spending is expensed. Nonetheless, the average historical stock returns of firms doing R&D matches the returns of firms without R&D. However, the market is apparently too pessimistic about beaten-down R&D-intensive technology stocks' prospects. Companies with high R&D to equity market value (which tend to have poor past returns) earn large excess returns. A similar relation exists between advertising and stock returns. R&D intensity is positively associated with return volatility.     

The Relation Among Targets' R&D Activities, Acquirers' Returns, and In-Process R&D in the US

Abstract:  Using a sample of 129 mergers and acquisitions (M&As) in the US between publicly traded acquirers and targets in research and development (R&D) intensive industries over the period of 1994-2004 and a size- and industry-matched sample, we examine the relation among targets' R&D activities, the probability of acquirers' writing-off in-process R&D (IPRD), and acquirers' returns around the time of M&A announcements. We find that firms acquiring targets with higher R&D investments tend to write off some of the acquired R&D assets upon the completion of the M&As. We also find that the median cumulative abnormal return during the three days around M&A announcements for acquirers with subsequent IPRD write-offs is −2.73% while the return for acquirers without IPRD write-offs is −0.60%. This suggests that acquirers' stock returns around M&A announcements are much lower when investors expect acquirers to expense IPRD. The results are consistent with our conjecture that acquirers tend to write-off IPRD when they acquire overvalued targets. We also find that IPRD write-offs do not increase earnings or stock returns of acquirers after M&As, which is inconsistent with an earnings management hypothesis.     

Mispricing and risk of R&D investment in European firms

We study whether R&D-intensive firms earn superior stock returns compared to matched size and book-to-market portfolios across several financial markets in Europe. Mispricing can arise if investors are not able to correctly estimate the long-term benefits of R&D investment or whether R&D firms are more risky than others. The results confirm that more innovative firms can earn future excess returns. Stocks listed on continental Europe markets and operating in high-tech sectors are more prone to undervaluation. This can be caused in the first case by information asymmetries that are more severe in bank-based countries. No evidence is found for a different risk pattern of R&D-intensive stocks.     

The Association of R&D and Capital Expenditures with Subsequent Earnings Variability

Abstract:  We estimate the association of investments in R&D and in physical assets (CAPEX) with subsequent earnings variability. We estimate these relations in different time periods and across industries. We find that R&D contributes to subsequent earnings variability more than CAPEX only in relative R&D-intensive industries – industries in which R&D is relatively more intensive than physical capital. In physical assets-intensive industries, we do not find similar relations. The findings suggest that with respect to subsequent earnings variability, fundamental differences between investment information about R&D and CAPEX exist. However, they are mainly noticeable in firms that operate in relatively R&D-intensive industries. The evidence also suggests there was a shift in the relations between R&D and CAPEX over time. Our findings contribute to the debate on accounting for R&D expenditures.     

The Usefulness of Book-to-Market and ROE Expectations for Explaining UK Stock Returns

Abstract:  The fundamental valuation perspective on stock returns suggests that book-to-market will be positively related to returns if market value of equity equals future expected cash flows discounted at the expected return and book value proxies for future cash flows. Building on this perspective, we develop a log linear model which includes expectations of future BM and ROE in addition to current BM as explanatory variables for future stock returns. We show that these three variables explain a significant part of UK cross-sectional stock returns and that they remain highly statistically significant after including additional risk proxy variables. This supports relevance of fundamental valuation based firm characteristics for explaining stock returns and indicates their potential usefulness for predicting future stock returns.     

Risk,Mispricing, and Value Investing

We evaluate the stock return performance of a modified version of the book-to-market strategy and its implications for market efficiency. If the previously documented superior stock return of the book-to-market strategy represents mispricing, its performance should be improved by excluding fairly valued firms with extreme book-to-market ratios. To attain this, we classify stocks as value or glamour on book-to-market ratios and accounting accruals jointly. This joint classification is likely to exclude stocks with extreme book-to-market ratios due to mismeasured accounting book values reflecting limitations underlying the accounting system. Using both 12-month buy-and-hold returns and earnings announcement returns, our results show that this joint classification generates substantially higher portfolio returns in the post-portfolio-formation year than the book-to-market classification alone with no evidence of increased risk. In addition, this superior stock return performance is more pronounced among firms held primarily by small (unsophisticated) investors and followed less closely by market participants (stock price <$10). Finally, and most importantly, financial analysts are overly optimistic (pessimistic) about earnings of glamour (value) stock, and for a subset of firms identified as overvalued by our strategy, the earnings announcement raw return, as well as abnormal return, is negative. These last results are particularly important because it is hard to envision a model consistent with rational investors holding risky stocks with predictable negative raw returns for a long period of time rather than holding fT-bills and with financial analysts systematically overestimating the earnings of these stocks while underestimating earnings of stocks that outperform the stock market.     

Explaining the Short‐ and Long‐Term IPO Anomalies in the US by R&D

Abstract:   Financial scholars who research the initial underpricing and long‐term underperformance of IPOs generally attribute these phenomena to information asymmetry and investors' misevaluations. Here, we identify, on a sample of 2,696 US IPOs issued during 1980–1995, a widespread source of information asymmetry and valuation uncertainty—the R&D activities of issuers—and document that these activities significantly affect both the initial underpricing of IPOs (R&D is positively correlated with underpricing) and their long‐term performance (R&D is positively related to long‐term performance). Given the pervasiveness and constant growth of firms' R&D activities in modern economies, our identification of R&D as a major factor affecting IPO's performance contributes to the understanding of this important economic and capital market phenomenon.     

Does the stock market reward innovation? European stock index reaction to negative news during the global financial crisis

This study uses data on 27 European stock indices over the period from January 2007 to December 2012 to investigate the relationship between innovations and the market reaction to negative news during the financial crisis. We use the bivariate BEKK-GARCH approach to estimate time-varying betas and abnormal returns. We show that index prices of countries in the high (low) innovation groups experience significantly positive (negative) abnormal returns on and following the negative news announcement dates. We also find that index beta changes following the arrival of bad news is negatively associated with a country's innovativeness. This finding suggests that innovations promote economic stability and enhance investors' confidence in a country's ability to cope during difficult times. Thus, policy makers who are concerned with sustainable growth should encourage R&D investments by adopting effective policies and avoid unnecessary cuts in R&D expenditures even during times of crisis. A study of the pre-crisis period from January 2001 to December 2006, using the same methods, indicates that investors value innovation more during difficult times.     

Do Privatization IPOs Outperform in the Long Run?

This paper investigates the long-run stock returns of privatization initial public offering (IPO) firms using a sample of 241 privatization IPOs from 42 countries during the period 1981-2003. We compare one-, three-, and five-year holding period returns of privatization IPOs to those of the domestic stock market indices and to size and size- and book-to-market equity ratio (BM)-matched firms from the same countries. Consistent with previous studies, we find that privatization IPOs significantly outperform their domestic stock markets in the long run. However, they show less consistent abnormal long-term stock performance relative to their size or size- and BM-matched benchmark firms.     

Overreaction after Controlling for Size and Book-to-Market Effects and its Mimicking Portfolio in Japan

In this paper we observe that firm size (SZ) and book-to-market (BM) cannot fully explain stock returns on prior-return- (PR-) based portfolios in the Japanese stock market. The overreaction effect after controlling for the SZ and BM effects is significant and persistent, and accounts for a large part of the zero-investment returns on the loser to the winner. We therefore propose a new mimicking portfolio whose returns mimic the common factor in returns related to overreaction. Our evidence shows that the proposed four-factor model captures common variation in returns on portfolios, based on stocks SZ, BM, and PR, better than the well-known three-factor model does.     

Endogenous technological progress and the cross-section of stock returns

I study the cross-sectional variation of stock returns and technological progress using a dynamic equilibrium model with production. Technological progress is endogenously driven by research and development (R&D) investment and is composed of two parts. One part is devoted to product innovation; the other, to increasing the productivity of physical investment. The latter is embodied in new tangible capital. The model breaks the symmetry assumed in standard models between tangible and intangible capital, in which the accumulation processes of tangible and intangible capital stock do not affect each other. Qualitatively and, in many cases, quantitatively, the model explains well-documented empirical regularities.     

Relations Between Stock Returns and Fundamental Variables: Evidence from a Segmented Market

This study examines relations between stock returns and potential explanatory factors in Korea, an important and segmented emerging market. Our results show that Korean stock returns in general and returns on stocks listed in Section 1 in particular are significantly positively related to book-to-market, sales-price, and debt-equity ratios, but not significantly related to market value of equity. Returns on stocks listed in Section 2 are, however, negatively related to market value of equity and not significantly related to the other three variables. Among the variables investigated by us, book-to-market ratio has the greatest explanatory power for stock returns and it indicates superior returns for value stocks. Our findings strengthen the international evidence of the role of book-to-market ratio in explaining stock returns by demonstrating its significance even in the segmented Korean market.     

资本支出、公司规模与账面市值比效应——基于A股上市公司的研究

基于成熟资本市场的理论及实证研究表明,在不确定的环境下,公司最优资本支出提高了市场价值,降低了账面市值比,账面市值比对收益率的预测作用可以通过公司的最优投资行为来解释。基于这一机制,本文对我国上市公司规模、资本支出及账面市值比效应进行了研究。我们发现,第一,按照Fama-French(1992,1993)方法构建投资组合的潜在条件同样是公司前期的资本支出,本期资本支出在提高公司市场价值的同时,非但没有降低反而提高了小规模组公司期末账面市值比;第二,控制规模的情况下,资本支出较显著降低了公司的预期收益,在大规模公司中表现最明显;第三,本期资本支出对规模效应具有一定解释力,但对账面市值比效应并不具有显著解释力;第四,我国上市公司股票价格变动更多由会计业绩变动决定而非风险变动所决定,据此对上述发现作出了尝试性的解释。     

R&D Increases and Long‐Term Performance of Rivals

We examine how a firm's research and development (R&D) increases affect its intra‐industry competitors in the long run. Consistent with the R&D spillover hypothesis, when a firm unexpectedly increases its R&D spending, its intra‐industry competitors experience improvements in operating performance and analyst forecast revisions and earn positive abnormal stock returns in the long run. The industry concentration, which is related to the firm's strategic reaction, is crucial in determining the magnitude of the R&D spillover effect.     

R&D Progress, stock price volatility, and post-announcement drift: An empirical investigation into biotech firms

I investigate the effects of R&D progress on the dynamics of stock price volatility and the post announcement drift to provide insights into whether or not and how capital markets react to corporate R&D progress in the context of the biotech industry. I find both stock price volatility and the post announcement drift decrease in R&D progress. More importantly, the decrease is proportional to the increase in the drug development success rate driven by R&D progress. Findings suggest that R&D progress conveys useful risk-relevant information, and plays an important role in explaining stock price volatility change and market anomalies.     

Momentum and Foreign Investors: Evidence from the Korean Stock Market

Abstract:

We examine whether the price impact of foreign investors on the Korean stock market from December 2000 to February 2007 generated a momentum phenomenon. In our empirical results, foreigners seem to have exerted a significantly positive impact on prices in “up” markets (periods of positive stock returns), but have had little impact on prices in “down” markets (periods of negative returns). We document that the impact of foreigners’ trades is concentrated in large companies. Most importantly, when the market is in the up state, the returns of stocks of large companies that were positively affected by foreign investors in the previous six-month period continue to increase in the subsequent six-month period. As a result, the subsequent six-month return on a past “winner” stock portfolio is significantly higher than that on a past “loser” stock portfolio. This brings to mind a momentum phenomenon that has been reported not to exist in the Korean stock market.     

深化增值税改革的市场反应及影响因素

运用事件研究法和多元回归法考察 “深化增值税改革”（2018年3月28日国务院常务会议）的市场反应及其影响因素。结果表明：尽管中美“贸易战”对股市产生了较大的负面影响,但投资者仍将“深化增值税改革”视为利好消息,且试点行业的市场反应都显著为正。从市场反应影响因素来看,研发支出越多、融资约束越强的公司市场反应更好。此外,进一步细分公司特征发现,高税收敏感度和高产品市场竞争程度的公司市场反应更加积极,存在超额雇佣且研发支出较高以及不存在超额雇佣但融资约束较高的公司市场反应也更加积极。