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Organizational Form and Long-Run Stock and Operating Performance following Corporate R&D Expenditures

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  • Sheng-Syan Chen

    (Department of Finance, College of Management, National Taiwan University, No. 1, Sec. 4, Roosevelt Road, Taipei City 106, Taiwan, R.O.C)

  • Chin-Te Yu

    (Department of Finance, College of Management, National Taiwan University, No. 1, Sec. 4, Roosevelt Road, Taipei City 106, Taiwan, R.O.C)

  • Xuan-Qi Su

    (Department of Finance, College of Finance and Banking, National Kaohsiung First University of Science and Technology, No. 2, Jhuoyue Road, Nanzih District, Kaohsiung City 811, Taiwan, R.O.C)

  • Shu-Miao Lai

    (Department of Accounting, School of Commerce, Kainan University, No. 1, Kainan Road, Luzhu Shiang, Taoyuan 338, Taiwan, R.O.C)

Abstract

Building upon two competing hypotheses, the 'efficient investment' hypothesis and the 'internal capital markets' hypothesis, we set out in this study to examine the role of organizational form, in terms of 'focus' versus 'diversification', in explaining the long-run stock and operating performance following corporate R&D expenditure. In a sample of 165 announcements of increases in R&D expenditure, we find that focused announcing firms experience significantly greater long-run stock and operating performance following R&D investment, as compared to diversified announcing firms. Our findings are robust to different methods of generating long-run stock performance, various measures of operating performance and alternative benchmarks for the calculation of abnormal performance. Overall, our results provide convincing evidence to suggest that the 'efficient investment' hypothesis dominates the 'internal capital markets' hypothesis.

Suggested Citation

  • Sheng-Syan Chen & Chin-Te Yu & Xuan-Qi Su & Shu-Miao Lai, 2012. "Organizational Form and Long-Run Stock and Operating Performance following Corporate R&D Expenditures," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 15(04), pages 1-32.
    • Handle: RePEc:wsi:rpbfmp:v:15:y:2012:i:04:n:s0219091512500178
    DOI: 10.1142/S0219091512500178
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    References listed on IDEAS

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    1. Sanjai Bhagat & Andrei Shleifer & Robert W. Vishny, 1990. "Hostile Takeovers in the 1980s: The Return to Corporate Specialization," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1990 Micr), pages 1-84.
    2. David S. Scharfstein, 1998. "The Dark Side of Internal Capital Markets II: Evidence from Diversified Conglomerates," NBER Working Papers 6352, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Wei-Chuan Kao, 2018. "Innovation quality of firms with the research and development tax credit," Review of Quantitative Finance and Accounting, Springer, vol. 51(1), pages 43-78, July.
    2. Xiaoli Wang & Michael S. Long & Ren Raw Chen & Jingfeng Zhang, 2016. "Economic growth potential creating a real put and the resulting valuation of the firm," Review of Quantitative Finance and Accounting, Springer, vol. 47(3), pages 453-474, October.
    3. Paul Brockman & Dennis Y. Chung & Kenneth W. Shaw, 2017. "The R&D-abnormal return anomaly: a transaction cost explanation," Review of Quantitative Finance and Accounting, Springer, vol. 48(2), pages 385-406, February.
    4. Elya Nabila Abdul Bahri & Abu Hassan Shaari Md Nor & Tamat Sarmidi & Nor Hakimah Haji Mohd Nor, 2019. "The Role of Financial Development in the Relationship Between Foreign Direct Investment and Economic Growth: A Nonlinear Approach," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 22(02), pages 1-32, June.
    5. Bill Francis & Iftekhar Hasan & Lingxiang Li, 2016. "Abnormal real operations, real earnings management, and subsequent crashes in stock prices," Review of Quantitative Finance and Accounting, Springer, vol. 46(2), pages 217-260, February.

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    More about this item

    Keywords

    Organizational form; focused firms; diversified firms; efficient investment hypothesis; internal capital markets hypothesis; R&D;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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