Illiquidity, R&D Investment, and Stock Returns

Shamim Ahmed, Ziwen Bu and Xiaoxia Ye

Journal of Money, Credit and Banking, 2025, vol. 57, issue 4, 981-1022

Abstract: We propose a dynamic model of research and development (R&D) venture, which predicts that the positive relation between the firm's R&D investment and the expected stock returns strengthens with illiquidity. Consistent with the model's prediction, empirical evidence based on cross‐sectional regressions and double‐sorted portfolios largely suggests a stronger and positive R&D–return relation among illiquid stocks. A further analysis shows that the important role of illiquidity in the R&D–return relation cannot be explained by factors, such as financial constraints, innovation ability, and product market competition. Collectively, our results suggest that stock illiquidity is an independent driver of the R&D premium.

Date: 2025
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https://doi.org/10.1111/jmcb.13053

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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:57:y:2025:i:4:p:981-1022

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