The Linkage between Corporate Research and Development Intensity and Stock Returns: Empirical Evidence

Abstract

Research and development (R&D) is a significant driver of innovation that leads to superior performance. The present study attempts to examine the relationship between R&D intensity and a firm’s performance at both aggregate and industry levels in the emerging market of India using a battery of R&D intensity measures and stock market returns as a measure of a firm’s performance. The study was conducted on 1097 companies from six R&D-intensive industries. The Fama-French portfolio formation method was used to evaluate the stock market performance of R&D-intensive firms for both equal-weighted (EW) and value-weighted (VW) returns. The findings suggest that R&D intensity and stock returns show a positive relationship. A long–short strategy in R&D-intense firms has yielded 1.43% (t = 4.22) per month in the sample. In general, the results suggest an undervaluation of highly R&D-intensive firms that investors can exploit for above-average returns. The effect is not homogeneous across return schemes (equal-weighted and value-weighted) or across industries. R&D growth measures and R&D capital are not found to have significant impacts on stock returns. Both the market firm size and age are included as control variables, and the results reveal that the relationship is robust to these control variables. The sub-periods ranging from 2000 to 2007 and 2008 to 2019 have been considered in the present study and the results are consistent with the overall sample. The study fills the existing empirical void for R&D intensity and stock returns in relation to the emerging market of India.