Research Quotient, Optimal R&D and Stock Returns

34 Pages Posted: 14 May 2018 Last revised: 15 Oct 2020

See all articles by Caterina Santi

Caterina Santi

University of Liège - HEC Liège

Date Written: January 25, 2019

Abstract

We find that the stock market appears to mis-value the innovative activity of firms which are currently investing in R&D above its optimal value. A long-short portfolio strategy which exploits information on the firm’s innovative ability and R&D level is profitable only for firms that overspend in R&D, in particular it earns excess returns of 14% annually. However, applying the strategy to the entire sample of firms may reduce portfolio risk. The analysis of the level of volatility of future stock returns of overspending firms suggests that limited attention and the higher risk of these firms contribute to the effect.

Keywords: optimal R&D, innovative ability, limited attention, return predictability, market efficiency

JEL Classification: G12, G14, O32

Suggested Citation

Santi, Caterina, Research Quotient, Optimal R&D and Stock Returns (January 25, 2019). WRDS Research Paper, Available at SSRN: https://ssrn.com/abstract=3170754 or http://dx.doi.org/10.2139/ssrn.3170754

Caterina Santi (Contact Author)

University of Liège - HEC Liège ( email )

Rue Louvrex 14
Liège, 4000
Belgium

HOME PAGE: http://www.caterinasanti.com

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