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R&D investment and risk in Brazil

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  • da Silva, Raphael Braga
  • Klotzle, Marcelo Cabus
  • Pinto, Antonio Carlos Figueiredo
  • da Motta, Luiz Felipe Jacques

Abstract

This study evaluates whether the undervaluation of R&D firms, as observed in developed markets, is due to mispricing or to risk adjustment for innovative activity. Analyzing stocks listed on the São Paulo Stock Exchange from 2006 through the first half of 2014, we compare returns to portfolios of firms differing in industry-adjusted R&D intensity (IRDI), without and with controls for risk (modeled in two ways). Our results indicate that a long-short strategy of buying stock in high-IRDI firms and short-selling stock in low-IRDI firms provides a significant abnormal return of 4.78% per year without controls for risk; after various risk factors are controlled, the return rises to 5.16% or 5.28%, depending on how risk is modeled. These results suggest that investors undervalue companies that invest more than their industry's average in R&D, and that the abnormal returns cannot be attributed to systematic In fact, cross-sectional regressions show that firms with greater IRDI are less risky than those with low intensity, exhibiting lower future volatility in the three years after the R&D investment. In addition, using the number of analysts as a proxy for investor attention, we show that companies with high IRDI that also provide more information to the market about their innovation projects can mitigate approximately 40% of their potential undervaluation.

Suggested Citation

  • da Silva, Raphael Braga & Klotzle, Marcelo Cabus & Pinto, Antonio Carlos Figueiredo & da Motta, Luiz Felipe Jacques, 2018. "R&D investment and risk in Brazil," Global Finance Journal, Elsevier, vol. 35(C), pages 106-114.
    • Handle: RePEc:eee:glofin:v:35:y:2018:i:c:p:106-114
    DOI: 10.1016/j.gfj.2017.08.003
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    More about this item

    Keywords

    Innovation; Risk; Research and development; Returns;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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