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Financial Constraints, R&D Investment, and Stock Returns

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  • Dongmei Li
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    Abstract

    Through the interaction between financial constraints and R&D, I study two asset-pricing puzzles: mixed evidence on the financial constraints--return relation and the positive R&D-return relation. Unlike capital investment, R&D is more inflexible. A financially constrained R&D-intensive firm is more likely to suspend/discontinue R&D projects. Therefore, R&D-intensive firms' risk increases with their financial constraints. Conversely, constrained firms' risk increases with their R&D intensity. I find a robust empirical relation between financial constraints and stock returns, primarily among R&D-intensive firms. Moreover, R&D predicts returns only among financially constrained firms. This evidence suggests that financial constraints potentially drive the positive R&D-return relation. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

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    Bibliographic Info

    Article provided by Society for Financial Studies in its journal Review of Financial Studies.

    Volume (Year): 24 (2011)
    Issue (Month): 9 ()
    Pages: 2974-3007

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    Handle: RePEc:oup:rfinst:v:24:y:2011:i:9:p:2974-3007

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    Cited by:
    1. Chrysovalantis Gaganis & Iftekhar Hasan & Fotios Pasiouras, 2013. "Efficiency and stock returns: evidence from the insurance industry," Journal of Productivity Analysis, Springer, vol. 40(3), pages 429-442, December.
    2. Ramana Nanda & Matthew Rhodes-Kropf, 2011. "Investment Cycles and Startup Innovation," Harvard Business School Working Papers 12-032, Harvard Business School, revised Dec 2012.
    3. Farrell, Kathleen & Unlu, Emre & Yu, Jin, 2014. "Stock repurchases as an earnings management mechanism: The impact of financing constraints," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 1-15.
    4. Hirshleifer, David & Hsu, Po-Hsuan & Li, Dongmei, 2013. "Innovative efficiency and stock returns," Journal of Financial Economics, Elsevier, vol. 107(3), pages 632-654.
    5. Popov, Alexander, 2013. "Credit constraints and investment in human capital: training evidence from transition economies," Working Paper Series 1606, European Central Bank.

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