R&D Spillover and Predictable Returns

Abstract:     
This study provides evidence that a firm’s stock return is predictable by R&D activities of other firms in the industry, and that such predictability is due to investor inattention to cross-firm value-relevant information. We identify a group of firms ('R&D Leaders') in an industry that have a burst of R&D activities during a given year as well as firms ('Peers') in the same industry but do not have substantial R&D increases. We find that the Peers experience significantly positive abnormal returns during the subsequent year, with an annualized four-factor alpha of 4.32%. In addition, they have significantly positive abnormal operating performance during the subsequent years, and they positively surprise investors at the time of earnings announcements. We further construct three measures of investor attention to cross-firm value-relevant information based on the common holdings of R&D leaders and Peers by institutional investors and active equity mutual funds, and common coverage of R&D Leaders and Peers by analysts. Peers receiving low cross-firm investor attention have similar abnormal future operating performance as Peers receiving high cross-firm investor attention, however the former have substantially higher abnormal stock returns and more positive investor surprises at earnings announcements.

Number of Pages in PDF File: 38

Keywords: R&D spillover, leaders, peers, investor attention

JEL Classification: Q3, G1

working papers series