R&D Information Quality and Stock Returns

45 Pages Posted: 1 Feb 2016 Last revised: 14 Jan 2019

See all articles by Tao Huang

Tao Huang

Beijing Normal University-Hong Kong Baptist University United International College

Junye Li

ESSEC Business School

Fei Wu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Ning Zhu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); Tsinghua University - PBC School of Finance

Date Written: December 31, 2018

Abstract

Investors demand higher premiums from firms whose future performance in R&D is difficult to evaluate. We construct a measure that captures investors' evaluation of a firm's R&D information quality (RDIQ) by linking a firm's historical innovation input (R&D expenditures) and innovation outcome (sales) and find significant evidence that expected excess returns decrease with RDIQ. The high-minus-low RDIQ hedge portfolio earns excess returns of about -23 (-25) basis points per month in value-weighted (equal-weighted) returns. The RDIQ effect is weakly correlated with commonly used risk factors, is stronger for firms with greater uncertain business environment, and exhibits incremental pricing power.

Keywords: Research and Development; Innovation; Information Quality; Return Predictability; Factor Models.

JEL Classification: G12, G14, O32

Suggested Citation

Huang, Tao and Li, Junye and Wu, Fei and Zhu, Ning, R&D Information Quality and Stock Returns (December 31, 2018). Available at SSRN: https://ssrn.com/abstract=2725078 or http://dx.doi.org/10.2139/ssrn.2725078

Tao Huang (Contact Author)

Beijing Normal University-Hong Kong Baptist University United International College ( email )

2000 Jintong Road
Zhuhai, Guangdong 519087
China

Junye Li

ESSEC Business School ( email )

5 Nepal Park
Singapore, Singapore 139408
Singapore

Fei Wu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Ning Zhu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Tsinghua University - PBC School of Finance

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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