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Limits-to-arbitrage, investment frictions, and innovation anomalies

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  • Chan, Konan
  • Lin, Yueh-Hsiang
  • Wang, Yanzhi

Abstract

This paper examines whether the limits-to-arbitrage and investment frictions hypotheses explain the research and development (R&D) premium. We find that the R&D premium is stronger for stocks that are hard to arbitrage and for stocks with investment frictions. The limits-to-arbitrage explanation explains more of the R&D premium than does the investment frictions explanation. Our results hold under the two-way sorts on limits-to-arbitrage and investment frictions measures. We also examine the impact of limits-to-arbitrage and investment frictions on innovation efficiency and R&D ability. We find that the limits-to-arbitrage and investment frictions are equally effective in explaining the two new innovation anomalies.

Suggested Citation

  • Chan, Konan & Lin, Yueh-Hsiang & Wang, Yanzhi, 2017. "Limits-to-arbitrage, investment frictions, and innovation anomalies," Pacific-Basin Finance Journal, Elsevier, vol. 43(C), pages 1-14.
    • Handle: RePEc:eee:pacfin:v:43:y:2017:i:c:p:1-14
    DOI: 10.1016/j.pacfin.2017.01.001
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