Corporate R&D spending, subsidies and stock market reactions to seasoned equity offering announcements: evidence from China

Xin Xiang

International Journal of Emerging Markets, 2022, vol. 18, issue 11, 5380-5407

Abstract: Purpose - This study focuses on an emerging market, China, and investigates the effects of corporate research and development (R&D) spending and subsidies on stock market reactions to seasoned equity offering (SEO) announcements. Design/methodology/approach - The study uses a sample of SEOs announced over the period of 2003–2018 in the Chinese A-share market. The cumulative abnormal stock returns (CARs) are adopted to measure the stock market response to SEOs. The R&D spending-to-sales ratio (R&D subsidies) in 2 years before SEO announcements is used to measure the pre-SEO R&D spending (R&D subsidies). The instrumental variable (IV) regression method is applied to address the endogeneity problem in the robustness test. Findings - This study demonstrates that firms with high R&D spending suffer stock overpricing and experience a negative market reaction when they announce SEOs, but R&D subsidies alleviate stock overpricing and mitigate the negative relationship between R&D spending and SEO market reactions. Originality/value - Although the prior studies have demonstrated that information asymmetry, which causes stock overpricing, explains negative stock market reactions to SEOs, it is unclear if a certain factor that causes information asymmetry affects SEO market reactions. This study fills this gap and focuses on R&D spending, demonstrating that R&D spending is negatively related to SEO performance.

Keywords: R&D spending; SEOs; Stock market reactions; Stock overpricing; G14; G32; G38; O31 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijoemp:ijoem-06-2021-0916

DOI: 10.1108/IJOEM-06-2021-0916

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