R&D Investment and Market Reactions in Non-crisis and Crisis Periods: Evidence from Taiwan

Shu-Ching Chou and Thanh Long Phan

International Journal of Financial Research, 2016, vol. 7, issue 5, 7-18

Abstract: This study examines market reactions to firms with different level of R&D expenditure. In particular, we investigate whether R&D investment in an uncertain environment, such as during the global financial crisis of 2008, will aggravate the level of information asymmetry and increase the likelihood of undervaluation on R&D stocks. We use a sample of Taiwanese firms and classify the sample into four portfolios: no R&D, low R&D, middle R&D and high R&D firms, and estimate abnormal returns using the Fama and French three factor and Carhart four factor models. We find that the no R&D portfolio has the highest positive and significant abnormal returns in the non-crisis period (2000-2007), while the high R&D portfolio has the highest abnormal return in crisis period (2008-2011). Our multivariate analysis provides supporting evidence that high R&D firms have a greater extent of information asymmetry than no R&D firms during the crisis period, while no R&D firms bear a high risk of low growth potential in non-crisis period. Similar results are obtained either by equal-weighted or value-weighted portfolio returns. Recent studies propose that investors may misprice high-tech firms. Our results provide international evidence that investors react differently to no R&D and R&D intensive firms, and R&D investment in crisis period will aggravate information asymmetry and the extent to which investors underestimate the value of R&D stocks.

Keywords: research and development; abnormal returns; market efficiency; crisis period (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:jfr:ijfr11:v:7:y:2016:i:5:p:7-18

DOI: 10.5430/ijfr.v7n5p7

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