R&D Profitability: The Role of Risk and Knightian Uncertainty
11 Pages Posted: 19 Sep 2015
Date Written: September 1, 2015
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
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