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Corporate investment and growth opportunities: The role of R&D-capital complementarity

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  • Sanford, Anthony
  • Yang, Mu-Jeung

Abstract

How does the interaction of uncertainty and R&D impact corporate investment? We provide evidence that R&D significantly increases corporate investment responsiveness to PVGO news and uncertainty shocks. These results are consistent with predictions from the R&D-based real options model of corporate investment. To establish credible causal results we combine new measures of systematic and firm-specific PVGO shocks, for which we utilize stock price and option data, with exogenous measures of R&D capital stocks derived from panel variation in state R&D tax credits. We also rule out a number of potentially competing explanations for our results, including firm-level differences in lumpiness of investments, financial frictions, lifecycle growth opportunities or moral hazard-implied asset substitution or risk shifting.

Suggested Citation

  • Sanford, Anthony & Yang, Mu-Jeung, 2022. "Corporate investment and growth opportunities: The role of R&D-capital complementarity," Journal of Corporate Finance, Elsevier, vol. 72(C).
    • Handle: RePEc:eee:corfin:v:72:y:2022:i:c:s0929119921002522
    DOI: 10.1016/j.jcorpfin.2021.102130
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    More about this item

    Keywords

    Corporate investment; PVGO; R&d; Option exercise;
    All these keywords.

    JEL classification:

    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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