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
July 19, 2014
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 a small group of industry “R&D Leaders” that have a burst of R&D activities and a large group of “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. Such results are not explained away by exogenous industry shocks to demand or productivity. Further, abnormal returns to Peers are concentrated in those having low investor attention.
Number of Pages in PDF File: 48
Keywords: limited attention, R&D, spillover, externality, predictable returns
JEL Classification: O3, G1, G02
Date posted: September 23, 2012 ; Last revised: July 20, 2014
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