What explains the association between R&D increases and excess stock returns?

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dc.contributor Aalto University en
dc.contributor Aalto-yliopisto fi
dc.contributor.author Ilvonen, Joonas
dc.date.accessioned 2013-12-02T09:16:34Z
dc.date.available 2013-12-02T09:16:34Z
dc.date.issued 2013
dc.identifier.uri https://aaltodoc.aalto.fi/handle/123456789/11751
dc.description.abstract Abstract: It seems sensible to assume that technological innovation has a positive association with stock market returns. Indeed, Hsu (2009) finds R&D shocks to hold positive and distinct predictive power for U.S. market returns, a pattern also found in international data. However, the association between R&D and excess stock returns is more nuanced in a firm-specific framework. The same consensus view still holds - increased R&D is associated with excess returns - but there is an unsolved debate regarding the cause of this observation. Some authors suggest the excess returns are due to the mispricing of R&D by investors, while others argue for risk-based compensation. My study's novelty is to include a control group of matched firms that have not significantly increased R&D, allowing me to examine the potential differences in performance between firms that have significantly increased R&D and those that have not. I also test if increased R&D is more valuable for diversified than for single-segment firms, as inadequate R&D is a potent cause for diversification discount. Borrowing the methodology from Eberhart et al. (2004), my sample includes 348 public U.S. companies, each matched with a benchmark firm. I use the period 1974-2006 for identifying significant R&D increases in NYSE listed companies, as 1974 is the year when accounting treatment of R&D expense reporting is standardized. Consequently I have chosen a sample containing 5 years of operating and stock performance data for each sample firm. I retrieve the fundamental data from COMPUSTAT and data on stock returns from CRSP. I find R&D increases to be positively associated with excess stock returns, while my results also suggest increased R&D not to be the actual source of excess returns, as a control group of firms that have not increased their R&D experience similar excess returns than those firms that have. Moreover, following their R&D increases, single-segment firms experience higher excess returns than diversified firms. The diversified firms' benchmark firms that have not increased R&D earn higher excess returns, while the single-segment firms' matched firms slightly underperform. These findings propose that there is an industry-specific factor driving the excess stock returns during the time periods when a firm operating in a certain industry significantly increases R&D. This notion is consistent with earlier literature suggesting an extra risk factor associated with R&D not captured by the traditional factor models. Furthermore, the outperformance of single-segment firms over diversified firms could be due to financial constraints that drive the risk and return relation. My findings on the financing behavior of single-segment firms support this explanation, as single-segment firms are more likely to substitute debt for equity than diversified firms. en
dc.format.extent 62
dc.language.iso en en
dc.title What explains the association between R&D increases and excess stock returns? en
dc.type G2 Pro gradu, diplomityö fi
dc.contributor.school Kauppakorkeakoulu fi
dc.contributor.school School of Business en
dc.contributor.department Department of Finance en
dc.contributor.department Rahoituksen laitos fi
dc.subject.keyword research and development
dc.subject.keyword excess stock returns
dc.subject.keyword diversification discount
dc.identifier.urn URN:NBN:fi:aalto-201312058068
dc.type.dcmitype text en
dc.programme.major Finance en
dc.programme.major Rahoitus fi
dc.type.ontasot Master's thesis en
dc.type.ontasot Pro gradu tutkielma fi
dc.subject.helecon rahoitus
dc.subject.helecon financing
dc.subject.helecon menot
dc.subject.helecon expenditure
dc.subject.helecon monialayritykset
dc.subject.helecon conglomerate companies
dc.subject.helecon asenteet
dc.subject.helecon attitudes
dc.ethesisid 13384
dc.date.dateaccepted 2013-11-06
dc.location P1 I


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