Research and Development and Firm Risk

Abstract

Spending on R&D has grown faster than other investments. This may result in higher return and higher risk. We focus on the latter and examine how research and development (R&D) affects the risks of US firms. We analyze the impact on the firm’s beta, its systematic and idiosyncratic risk, and the combination of the latter two (total risk). Because investors prefer upside to downside risk, we also analyze whether downside risk is influenced by R&D. Panel and quantile regressions show that the impact is positive and highly significant for beta, systematic risk and total risk. These effects are, moreover, stronger at higher relative levels of R&D spending. Unfortunately for investors, downside risk is also increasing with relative R&D spending.

Keywords: R&D, beta, systematic risk, idiosyncratic risk, downside risk

JEL Classification: G12, G14, G32