The R&D-abnormal return anomaly: a transaction cost explanation

Paul Brockman (), Dennis Y. Chung and Kenneth W. Shaw
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Paul Brockman: Lehigh University
Dennis Y. Chung: Simon Fraser University
Kenneth W. Shaw: University of Missouri

Review of Quantitative Finance and Accounting, 2017, vol. 48, issue 2, No 5, 385-406

Abstract: Abstract Previous research finds a positive and significant relation between current increases in R&D expenditures and future abnormal stock returns. While the existence of this anomalous pattern is well-established, its underlying causes are the subject of much debate. Recent research also shows that transaction costs can lead to apparent market anomalies such as the post-earnings-announcement drift. We combine these two lines of research and posit that the positive relation between R&D increases and future abnormal stock returns is due to transaction costs. Consistent with this hypothesis, we find that abnormal returns on R&D-based, zero-net-investment portfolios disappear after incorporating standard measures of transaction costs. Overall, our results show that the R&D-abnormal return anomaly is more likely due to transaction costs than to the alternative hypotheses of market inefficiency or omitted risk factors.

Keywords: R&D expenditures; Earnings; Transaction costs; Liquidity (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s11156-016-0555-3

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