R&D investment intensity and jump volatility of stock price

Cheng Jiang (), Kose John () and David Larsen ()
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Cheng Jiang: Fox School of Business, Temple University
Kose John: Stern School of Business, New York University
David Larsen: Fox School of Business, Temple University

Review of Quantitative Finance and Accounting, 2021, vol. 57, issue 1, No 8, 235-277

Abstract: Abstract This paper studies the important but unexplored relationship between R&D investment intensity and different components of stock price volatility. The total volatility of stock price is decomposed into a continuous component and a jump component. We find that firms with higher R&D investment intensity have less jump volatility of stock price. We explain the findings through a channel of stock liquidity and information disclosure. We argue that R&D-intensive firms prefer higher stock liquidity, and empirically document that they achieve higher stock liquidity by actively releasing R&D information. We apply a textual analysis technique and show that R&D-intensive firms voluntarily disclose more R&D information in 10-K, 10-Q and 8-K filings, resulting in higher stock liquidity and hence less jump volatility of stock price. The negative relationship between R&D investment intensity and jump volatility of stock price is more pronounced for financially constrained firms, which have stronger incentives to release R&D information and hence increase stock liquidity. Propensity-score matching approach and instrumental variable approach are used to address endogeneity. A rich set of robustness tests are conducted to confirm the findings.

Keywords: R&D investment intensity; Jump volatility of stock price; Stock liquidity; Textual analysis; Information disclosure; Financial constraint (search for similar items in EconPapers)
JEL-codes: G12 O16 O32 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11156-020-00944-3

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