Product market competition, R&D investment, and stock returns

Lifeng Gu

Journal of Financial Economics, 2016, vol. 119, issue 2, 441-455

Abstract: A standard real options model predicts a strong positive interaction effect between research and development (R&D) investment and product market competition. R&D-intensive firms tend to be riskier and earn higher expected returns than R&D-weak firms, particularly in competitive industries. Also, firms in competitive industries earn higher expected returns than firms in concentrated industries, especially among R&D-intensive firms. Intuitively, R&D projects are more likely to fail in the presence of more competition because rival firms could win the innovation race. Empirical evidence largely supports the model׳s predictions.

Keywords: Research and development investment; Product market competition; Risk premium; Stock returns (search for similar items in EconPapers)
JEL-codes: D43 G12 O32 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (86)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:119:y:2016:i:2:p:441-455

DOI: 10.1016/j.jfineco.2015.09.008

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