The Explanatory Power of R&D on Cross-Sectional Stock Return: Taiwan Evidence from 1996-2005

Abstract

The purpose of this paper is to examine the role of research and development (R&D) in explaining the cross-section of stock returns in the Taiwan market for the period from 1996 to 2005. Economic intuition suggests that expected stock return and the risk of return should be positively related to R&D. We divide the entire sample into three subperiods according to the index of the Taiwan stock market. The regression's result s indicate that average stock return is positively related to R&D expenditure in the entire sample, but the relation is not stable over three subperiods. In the first bubble-forming period (1996.01-2000.03), the average return is negatively related to R&D expenditure. In the second burst-of-bubble period (2000.04-2001.09), the relation is in fact positive, while in the third post-bubble period (2001.10-2005.12), the R&D effect is negative and significant. We also examine the relation of the total risk of returns with R&D intensity and find that R&D intensity is nearly positively correlated to the total risk of returns.