Public R&D Spending and Cross-Sectional Stock Returns

56 Pages Posted: 8 Dec 2015 Last revised: 9 Aug 2020

See all articles by Sheng‐Syan Chen

Sheng‐Syan Chen

National Chengchi University

Yan-Shing Chen

National Taiwan University

Woan-lih Liang

National Chiao-Tung University

Yanzhi Wang

National Taiwan University - Department of Finance

Date Written: August 23, 2016

Abstract

We examine how cross-sectional stock returns are influenced by research and development (R&D) spending funded by the public sector, which accounts for a substantial portion of total U.S. investments in innovation. Firms located in states with more public R&D spending earn higher abnormal stock returns. A long-short portfolio constructed by public R&D spending earns a monthly abnormal return of about 0.9%. The results persist after accounting for conventional pricing factors and state-level variables. We also find that better productivity improvements, higher R&D spillovers and greater cash flow risk explain why public R&D spending positively affects stock returns.

Keywords: Public R&D, Spending, Stock Returns

JEL Classification: G12, G14, H54, O38

Suggested Citation

Chen, Sheng-Syan and Chen, Yan-Shing and Liang, Woan-lih and Wang, Yanzhi, Public R&D Spending and Cross-Sectional Stock Returns (August 23, 2016). Available at SSRN: https://ssrn.com/abstract=2699830 or http://dx.doi.org/10.2139/ssrn.2699830

Sheng-Syan Chen

National Chengchi University

No. 64, Sec. 2, ZhiNan Rd., Wenshan District
Taipei 116, 116
Taiwan

Yan-Shing Chen

National Taiwan University ( email )

1 Sec. 4, Roosevelt Road
Taipei 106, 106
Taiwan

Woan-lih Liang

National Chiao-Tung University ( email )

1001 University Road
East District
Hsinchu, 300
Taiwan

Yanzhi Wang (Contact Author)

National Taiwan University - Department of Finance ( email )

1, Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

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