Over-investment in corporate R&D, risk, and stock returns

Mohsen Saad () and Zaher Zantout ()

Journal of Economics and Finance, 2014, vol. 38, issue 3, 438-460

Abstract: Large-size firms which significantly increase their R&D expenditures experience subsequently three-year-long negative abnormal stock returns on the magnitude of 56 basis-points per month. We find no robust evidence of significant event-induced abnormal returns for small-size sample firms or any systematic risk changes for the small- and large- size firms. We also find that the large-size sample firms generate relatively much larger cash flows (i.e., have significantly greater over-investment discretion) and have significantly larger (over-) valuation multiples than the small-size firms. Moreover, some of their operating performance measures show signs of deterioration instead of improvement following these R&D programs. These findings are consistent with the view that investors initially underestimate the over-investment in R&D by some large-size firms that appear to be overvalued and have high cash flows at the time of the investment, only to be disappointed later. Copyright Springer Science+Business Media, LLC 2014

Keywords: Corporate R&D Investment; Capital Market Efficiency; Growth Options; Systematic Risk; G14; G31; O32 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s12197-012-9226-y

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