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How Risky Is R and D? A Financial Approach

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  • Wedig, Gerard J

Abstract

In order to understand the relationship between market structure and the risk of innovation, this paper proposes a synthesis between the capital asset pricing model and simple models of industrial organization. The theoretical section of the paper discusses the real determinants of R&D riskiness, finding that several unique features of R&D assets may influence their systematic risk, including their strategic nature and random arrival as well as the firm's industry context. The empirical results suggest that there is a considerable systematic risk premium associated with R&D that can be partially offset by firm size and market concentration. Copyright 1990 by MIT Press.

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  • Wedig, Gerard J, 1990. "How Risky Is R and D? A Financial Approach," The Review of Economics and Statistics, MIT Press, vol. 72(2), pages 296-303, May.
    • Handle: RePEc:tpr:restat:v:72:y:1990:i:2:p:296-303
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    Cited by:

    1. Daniel L. Millimet, 2003. "Environmental Abatement Costs and Establishment Size," Contemporary Economic Policy, Western Economic Association International, vol. 21(3), pages 281-296, July.
    2. Philip Bromiley & Devaki Rau & Yu Zhang, 2017. "Is R&D risky?," Strategic Management Journal, Wiley Blackwell, vol. 38(4), pages 876-891, April.
    3. Cohen, Wesley M., 2010. "Fifty Years of Empirical Studies of Innovative Activity and Performance," Handbook of the Economics of Innovation, in: Bronwyn H. Hall & Nathan Rosenberg (ed.), Handbook of the Economics of Innovation, edition 1, volume 1, chapter 0, pages 129-213, Elsevier.
    4. Allen H. Huang & Jianghua Shen & Amy Y. Zang, 2022. "The unintended benefit of the risk factor mandate of 2005," Review of Accounting Studies, Springer, vol. 27(4), pages 1319-1355, December.
    5. Forero, Clemente & Corredor, Sandra & Forero, Nohora, 2010. "Business Networks and Innovation in SMEs of a Developing Country," Galeras. Working Papers Series 027, Universidad de Los Andes. Facultad de Administración. School of Management.
    6. Gharbi, Sami & Sahut, Jean-Michel & Teulon, Frédéric, 2014. "R&D investments and high-tech firms' stock return volatility," Technological Forecasting and Social Change, Elsevier, vol. 88(C), pages 306-312.
    7. Kumari, Pooja & Mishra, Chandra Sekhar, 2020. "Value relevance of aggregated and disaggregated earnings in India: Significance of intangible intensity," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 39(C).

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