Advertising, Research and Development, and Capital Market Risk: Higher Risk Firms versus Lower Risk Firms

Journal of Business Economics and Management 13 (4), 724-744

17 Pages Posted: 27 Feb 2011 Last revised: 5 Jan 2015

See all articles by Miao-Ling Chen

Miao-Ling Chen

National Sun Yat-sen University - Department of Finance

Chi-Lu (Edward) Peng

Chung Hua University - Department of Finance; National Sun Yat-sen University

An-Pin Wei

Sun Yat-sen University (SYSU) - International School of Business and Finance (ISBE)

Date Written: February 26, 2011

Abstract

In this study, we examine how a firm’s advertising and R&D affects the firm’s β-risk and idiosyncratic risk, which are metrics of interest to both finance executives and senior management. Due to the existence of non-normal finance data and heteroscedasticity, this study uses quantile regression to analyze the sample in order to avoid estimation bias. We generate six empirical generalizations. (1) Advertising is significantly associated with lower β-risk for firms with lower, median and higher β-risk. (2) R&D significantly increases β-risk for firms with median and higher β-risk firms. (3) Advertising is significantly associated with lower idiosyncratic risk for firms with higher idiosyncratic risk. (4) R&D is significantly associated with higher idiosyncratic risk for firms with median and higher idiosyncratic risk. (5) Our evidence shows that both advertising and R&D have a stronger effect on firms with higher β- and idiosyncratic risk than on those with lower β- and idiosyncratic risk, respectively. (6) Moreover, our evidence suggests that advertising and R&D tests resoundingly support our hypothesis that the coefficients vary across the quantiles

Keywords: Risk, Idiosyncratic Risk, Advertising, Marketing, R&D, Quantile Regression, CAPM

Suggested Citation

Chen, Miao-Ling and Peng, Chi-Lu and Wei, An-Pin, Advertising, Research and Development, and Capital Market Risk: Higher Risk Firms versus Lower Risk Firms (February 26, 2011). Journal of Business Economics and Management 13 (4), 724-744, Available at SSRN: https://ssrn.com/abstract=1770444 or http://dx.doi.org/10.2139/ssrn.1770444

Miao-Ling Chen

National Sun Yat-sen University - Department of Finance ( email )

No.70, Lianhai Rd., Gushan District,
Kaohsiung City
Taiwan

Chi-Lu Peng (Contact Author)

Chung Hua University - Department of Finance ( email )

No. 707, Sec. 2, WuFu Road
Hsinchu, Taiwan 300
Taiwan

National Sun Yat-sen University ( email )

No.70, Lianhai Rd., Gushan District,
Kaohsiung City
Taiwan

An-Pin Wei

Sun Yat-sen University (SYSU) - International School of Business and Finance (ISBE) ( email )

China

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