Abstract
We investigate the influence of research and development (R&D) investment on firms’ idiosyncratic risk. We find that firms’ R&D investment has a negative relationship with firms’ idiosyncratic risk. This relationship is proved to be robust according to several robustness tests including replacing RD variable with its logarithm and adding lag terms. Further analysis demonstrates that the effect of R&D investment on firms’ idiosyncratic risk is more pronounced in firms with lower market capitalization, non-state owned, lower leverage and non-Big 4 auditing. Moreover, our findings provide support to the notion that R&D investment can push firms’ innovation to further increase the diversification of the product and reduce their idiosyncratic risk. This conclusion also calls on the government to introduce new policies to encourage firms’ R&D investment.
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