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Product market competition, R&D investment, and stock returns

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  • Gu, Lifeng

Abstract

A standard real options model predicts a strong positive interaction effect between research and development (R&D) investment and product market competition. R&D-intensive firms tend to be riskier and earn higher expected returns than R&D-weak firms, particularly in competitive industries. Also, firms in competitive industries earn higher expected returns than firms in concentrated industries, especially among R&D-intensive firms. Intuitively, R&D projects are more likely to fail in the presence of more competition because rival firms could win the innovation race. Empirical evidence largely supports the model׳s predictions.

Suggested Citation

  • Gu, Lifeng, 2016. "Product market competition, R&D investment, and stock returns," Journal of Financial Economics, Elsevier, vol. 119(2), pages 441-455.
    • Handle: RePEc:eee:jfinec:v:119:y:2016:i:2:p:441-455
    DOI: 10.1016/j.jfineco.2015.09.008
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    References listed on IDEAS

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    More about this item

    Keywords

    Research and development investment; Product market competition; Risk premium; Stock returns;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • 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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