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Stock market valuation of R&D expenditures—The role of corporate governance

Author

Listed:
  • Chan, Konan
  • Chen, Hung-Kun
  • Hong, Li-Hong
  • Wang, Yanzhi

Abstract

This paper examines whether firms with greater research and development (R&D) expenditures earn higher stock returns when they have good corporate governance. After controlling for size, book-to-market ratio, momentum, asset growth, accruals, and abnormal capital expenditures, we determine that R&D-intensive firms indeed earn higher stock returns when they have well-established corporate governance. Our results are robust to a variety of industry fixed-effect controls, governance proxies, model specifications, and panel regression with standard errors adjusted for year clustering. Therefore, our results are not endogenously driven by inherent characteristics. These results suggest that good governance is able to prevent potential overinvestment in R&D spending, thereby increasing the rate of return for R&D spending firms.

Suggested Citation

  • Chan, Konan & Chen, Hung-Kun & Hong, Li-Hong & Wang, Yanzhi, 2015. "Stock market valuation of R&D expenditures—The role of corporate governance," Pacific-Basin Finance Journal, Elsevier, vol. 31(C), pages 78-93.
    • Handle: RePEc:eee:pacfin:v:31:y:2015:i:c:p:78-93
    DOI: 10.1016/j.pacfin.2014.12.004
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    2. Arif Khan, Muhammad & Qin, Xuezhi & Jebran, Khalil & Ullah, Irfan, 2020. "Uncertainty and R&D investment: Does product market competition matter?," Research in International Business and Finance, Elsevier, vol. 52(C).
    3. Lu, Jin-Ray & Hwang, Chih-Chiang & Lin, Chien-Yi, 2016. "Do shareholders appreciate capital investment policies of corporations?," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 344-353.
    4. Sameena Ghazal & Tariq Aziz & Mosab I. Tabash & Krzysztof Drachal, 2024. "The Linkage between Corporate Research and Development Intensity and Stock Returns: Empirical Evidence," JRFM, MDPI, vol. 17(5), pages 1-17, April.
    5. Chuluun, Tuugi & Prevost, Andrew & Upadhyay, Arun, 2017. "Firm network structure and innovation," Journal of Corporate Finance, Elsevier, vol. 44(C), pages 193-214.
    6. Dejan Ravšelj & Aleksander Aristovnik, 2020. "The Impact of R&D Expenditures on Corporate Performance: Evidence from Slovenian and World R&D Companies," Sustainability, MDPI, vol. 12(5), pages 1-20, March.
    7. Ningrui Wen & Muhammad Usman & Ahsan Akbar, 2023. "The Nexus between Managerial Overconfidence, Corporate Innovation, and Institutional Effectiveness," Sustainability, MDPI, vol. 15(8), pages 1-21, April.
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    More about this item

    Keywords

    Research and development; R&D; Corporate governance;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G - Financial Economics

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