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The explanatory power of R&D for the stock returns in the Chinese equity market

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  • Lu, Sean

Abstract

There is a vast literature documenting the evidence that the firms with higher research and development (R&D) intensity experience higher stock returns in both US and international market. This study seeks to examine whether the effect of R&D intensity can significantly predict the subsequent stock returns in the Chinese equity market. We construct three different measurements of R&D intensity factors using the firm's R&D expenditure scaled by market capitalization, book equity and net sales. Our test results show that all three R&D intensity factors can effectively predict subsequent stock returns, with low correlation to the other fundamental value, growth, and quality factors. Furthermore, our results indicate that the R&D effect is not only driven by big or small firms. The R&D signals, in particular those constructed using R&D expenditure deflated by market capitalization and book equity, are very effective across different index groups, including CSI 300, CSI 500 and CSI 1000.

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  • Lu, Sean, 2020. "The explanatory power of R&D for the stock returns in the Chinese equity market," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
    • Handle: RePEc:eee:pacfin:v:62:y:2020:i:c:s0927538x20302468
    DOI: 10.1016/j.pacfin.2020.101380
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    References listed on IDEAS

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