The explanatory power of R&D for the stock returns in the Chinese equity market

Sean Lu

Pacific-Basin Finance Journal, 2020, vol. 62, issue C

Abstract: There is a vast literature documenting the evidence that the firms with higher research and development (R&D) intensity experience higher stock returns in both US and international market. This study seeks to examine whether the effect of R&D intensity can significantly predict the subsequent stock returns in the Chinese equity market. We construct three different measurements of R&D intensity factors using the firm's R&D expenditure scaled by market capitalization, book equity and net sales. Our test results show that all three R&D intensity factors can effectively predict subsequent stock returns, with low correlation to the other fundamental value, growth, and quality factors. Furthermore, our results indicate that the R&D effect is not only driven by big or small firms. The R&D signals, in particular those constructed using R&D expenditure deflated by market capitalization and book equity, are very effective across different index groups, including CSI 300, CSI 500 and CSI 1000.

Keywords: R&D expenditure; Cross-section stock return; Regression (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:62:y:2020:i:c:s0927538x20302468

DOI: 10.1016/j.pacfin.2020.101380

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