Public R&D Spending and Cross-Sectional Stock Returns
56 Pages Posted: 8 Dec 2015 Last revised: 9 Aug 2020
Date Written: August 23, 2016
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: Suggested Citation