R&D Spillover and Predictable Returns
California State University, Fullerton
University of Iowa - Department of Finance
University of Iowa - Henry B. Tippie College of Business
August 1, 2013
We show that a firm’s stock return is predictable by R&D activities of other firms in the industry, and that such predictability is related to investor inattention to cross-firm information. We identify industry “R&D Leaders” that have a burst of R&D activities as well as “Peers” that are in the same industry but do not have substantial R&D increases. We find that Peers experience significantly positive abnormal returns and abnormal operating performance in subsequent years. They also positively surprise investors at the time of earnings announcements. Further, Peers with stronger economic links to Leaders experience higher abnormal stock returns. Finally, abnormal returns to Peers are concentrated in those having low investor attention, with an annual four-factor alpha of 8.4%.
Number of Pages in PDF File: 50
Keywords: limited attention, R&D, spillover, externality, predictable returns
JEL Classification: O3, G1, G02working papers series
Date posted: September 23, 2012 ; Last revised: August 7, 2013
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