Abstract
We examine how institutional investors trade stocks with high research and development (R&D) expenses and investigate whether they can detect value-relevant R&D. We document significant differences between hedge funds and other institutional investors in terms of their trading in high R&D stocks. We find that hedge funds (other institutional investors) invest more (less) in high R&D stocks compared to low R&D stocks. Moreover, while hedge funds have strong stock-picking ability in high R&D stocks, other institutional investors do not show any evidence of stock-picking ability. Our findings suggest that hedge funds have differential skillset to better identify the value-relevant R&D.
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