R&D Profitability: The Role of Risk and Knightian Uncertainty

11 Pages Posted: 19 Sep 2015

See all articles by Sara Amoroso

Sara Amoroso

European Commission, Joint Research Centre, Institute for Prospective Technological Studies (IPTS)

Pietro Moncada-Paternò-Castello

European Union - Institute for Prospective Technological Studies (IPTS)

Antonio Vezzani

European Commission, Joint Research Centre, Institute for Prospective Technological Studies

Date Written: September 1, 2015

Abstract

This paper provides the first empirical attempt of linking firms’ profits and investment in R&D revisiting Knight’s (1921) distinction between uncertainty and risk. Along with the risky profit-maximizing scenario, identifying a second, off-setting, unpredictable bias that leads to heterogeneous returns to R&D investments is crucial to fully understand the drivers of corporate profits. Consistently with the Knightian theory that relates risk to profitability, we model the impact of risk and uncertainty on profits and provide a first empirical attempt to model the effect of ambiguity on R&D returns.

Keywords: R&D investment, firms' operating profits, ambiguity, risk premium

JEL Classification: D22, D81, L20, O30

Suggested Citation

Amoroso, Sara and Moncada-Paternò-Castello, Pietro and Vezzani, Antonio, R&D Profitability: The Role of Risk and Knightian Uncertainty (September 1, 2015). Available at SSRN: https://ssrn.com/abstract=2662372 or http://dx.doi.org/10.2139/ssrn.2662372

Sara Amoroso (Contact Author)

European Commission, Joint Research Centre, Institute for Prospective Technological Studies (IPTS) ( email )

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Pietro Moncada-Paternò-Castello

European Union - Institute for Prospective Technological Studies (IPTS) ( email )

Antonio Vezzani

European Commission, Joint Research Centre, Institute for Prospective Technological Studies ( email )

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