R&D Investment and Market Reactions in Non-crisis and Crisis Periods: Evidence from Taiwan

This study examines market reactions to firms with different level of R&D expenditure. In particular, we investigate whether R&D investment in an uncertain environment, such as during the global financial crisis of 2008, will aggravate the level of information asymmetry and increase the likelihood of undervaluation on R&D stocks. We use a sample of Taiwanese firms and classify the sample into four portfolios: no R&D, low R&D, middle R&D and high R&D firms, and estimate abnormal returns using the Fama and French three factor and Carhart four factor models. We find that the no R&D portfolio has the highest positive and significant abnormal returns in the non-crisis period (2000-2007), while the high R&D portfolio has the highest abnormal return in crisis period (2008-2011). Our multivariate analysis provides supporting evidence that high R&D firms have a greater extent of information asymmetry than no R&D firms during the crisis period, while no R&D firms bear a high risk of low growth potential in non-crisis period. Similar results are obtained either by equal-weighted or value-weighted portfolio returns. Recent studies propose that investors may misprice high-tech firms. Our results provide international evidence that investors react differently to no R&D and R&D intensive firms, and R&D investment in crisis period will aggravate information asymmetry and the extent to which investors underestimate the value of R&D stocks.