Abstract
This paper investigates how R&D investment intensity can infuse information asymmetry about the growth prospects and the idiosyncratic volatility of non-financial firms. Panel Data Method has been employed in order to regress idiosyncratic volatility on R&D investments. Using a sample of research-intensive FTSE-100 and S&P-100 firms having the highest market capitalization between 2008 and 2017, the study finds the evidence of a positive association in between R&D investment intensity and idiosyncratic component of total stock return volatility. The study provides the insight that R&D-led firms should leverage on their R&D related sensitive information to reduce the level of idiosyncratic volatility.
Highlights
Total stock return volatility typically determines the overall financial risk of a firm
It is easy to understand that R&D activities and required investments are very specific to a firm that involves them
Based on the firms under the two indexes that invest in R&D, this study presents the evidence that idiosyncratic volatility is positively associated with the R&D investment intensity
Summary
Total stock return volatility typically determines the overall financial risk of a firm. R&D is accountable for generating asymmetry in information transmission about the firms’ future prospects and growth potentials In this connection, Aboody and Lev (2000) find the evidence that the distinctiveness of R&D investments makes it difficult for general investors (the outsiders) to learn about the productivity and worth of a particular company’s R&D. This may critically contribute to the information asymmetry for the R&D intensive firms relative to those having no R&D attempts.
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