The explanatory power of R&D for the stock returns in the Chinese equity market

Abstract

There is a vast literature documenting the evidence that the firms with higher research and development (R&D) intensity experience higher stock returns in both US and international market. This study seeks to examine whether the effect of R&D intensity can significantly predict the subsequent stock returns in the Chinese equity market. We construct three different measurements of R&D intensity factors using the firm's R&D expenditure scaled by market capitalization, book equity and net sales. Our test results show that all three R&D intensity factors can effectively predict subsequent stock returns, with low correlation to the other fundamental value, growth, and quality factors. Furthermore, our results indicate that the R&D effect is not only driven by big or small firms. The R&D signals, in particular those constructed using R&D expenditure deflated by market capitalization and book equity, are very effective across different index groups, including CSI 300, CSI 500 and CSI 1000.