Effects of R&D Investment on Stock Returns: An Analysis of Indian Publicly Listed Firms

The relationship between R&D investment and stock returns may be due to the disruption in adjustment costs or earnings management by the managers. Using an unbalanced panel data for 3823 publicly listed firms for the period 2011–2021 for India, we find that R&D expenditures and change in R&D expenditures have negative effects on stock returns while considering all listed firms. Therefore, our findings support the predictions of agency theory and behavioural theory of finance, according to which overconfident managers are likely to spend more on R&D projects, most of which are likely to be negative net present value projects, which in turn reduce firm value and hence stock returns. Our analysis reveals that the negative relationships between R&D expenditure and stock returns and between the change in R&D expenditure and stock returns that we observe for all listed firms are owed solely to low-technology firms. Our findings also show that R&D intensity has a positive effect on stock returns whereas volatility in R&D expenditures has a negative effect. The latter result supports the assertion that R&D volatility is consistent with adjustment costs associated with disruption which adversely affects firm performance. It suggests that volatility in R&D expenditures by earnings management is penalized by the market, hence reducing stock returns. We also observe that firm size has a moderating effect on the relationship between volatility in R&D and stock returns. Our finding also shows that these relationships were more pronounced during the Covid-19 crisis period in India.