Product Market Competition, R&D Investment and Stock Returns

33 Pages Posted: 8 Sep 2017

See all articles by Lifeng Gu

Lifeng Gu

The University of Hong Kong; University of Illinois at Urbana-Champaign

Date Written: May 31, 2015

Abstract

A standard real options model predicts a strong positive interaction effect between research and development (R&D) investment and product market competition. R&D-intensive firms tend to be riskier and earn higher expected returns than R&D-weak firms, particularly in competitive industries. Also, firms in competitive industries earn higher expected returns than firms in concentrated industries, especially among R&D-intensive firms. Intuitively, R&D projects are more likely to fail in the presence of more competition because rival firms could win the innovation race. Empirical evidence largely supports the model׳s predictions.

Keywords: Research and development investment; Product market competition; Risk premium; Stock returns

JEL Classification: D43, G12, O32

Suggested Citation

Gu, Lifeng, Product Market Competition, R&D Investment and Stock Returns (May 31, 2015). Journal of Financial Economics, 2015, Available at SSRN: https://ssrn.com/abstract=3032794

University of Illinois at Urbana-Champaign

1206 South Sixth Street
Champaign, IL 61820
United States

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