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Research & Development Premium in the Indian Equity Market: An Empirical Study

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  • Bhumiswor Sharma
  • Srikanth P

Abstract

This article aims to investigate the research and development (R&D) premium and explore the three most prominent asset pricing models: capital asset pricing and the three-and five-factor models (Fama & French, 1993; 2015). The results show that India's annualized average R&D premium is significantly higher than the existing value, market, profitability, size and investment premiums, implying that the R&D premium is a more significant concern for Indian investors, particularly for high R&D firms. It was also observed that by applying the GRS test and the Fama and MacBeth (1973) two-pass procedure, the R&D risk factor augmented the CAPM, FF3F and FF5F models outperforming the existing CAPM, FF3F and FF5F models, respectively. We can also report that R&D is, unquestionably, a priced ingredient and a critical factor in developing pricing models for developing markets such as India. The paper's conclusions add to the current literature in R&D and asset pricing and assist investment professionals in developing better investment and trading strategies.

Suggested Citation

  • Bhumiswor Sharma & Srikanth P, 2021. "Research & Development Premium in the Indian Equity Market: An Empirical Study," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 11(10), pages 816-828.
    • Handle: RePEc:asi:aeafrj:v:11:y:2021:i:10:p:816-828:id:4349
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