Corporate investment and growth opportunities: The role of R&D-capital complementarity

How does the interaction of uncertainty and R&D impact corporate investment? We provide evidence that R&D significantly increases corporate investment responsiveness to PVGO news and uncertainty shocks. These results are consistent with predictions from the R&D-based real options model o...

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Bibliographic Details
Published in:Journal of corporate finance (Amsterdam, Netherlands) Netherlands), 2022-02, Vol.72, p.102130, Article 102130
Main Authors: Sanford, Anthony, Yang, Mu-Jeung
Format: Article
Language:English
Subjects:
Corporate investment
Option exercise
PVGO
R&d
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Summary:How does the interaction of uncertainty and R&D impact corporate investment? We provide evidence that R&D significantly increases corporate investment responsiveness to PVGO news and uncertainty shocks. These results are consistent with predictions from the R&D-based real options model of corporate investment. To establish credible causal results we combine new measures of systematic and firm-specific PVGO shocks, for which we utilize stock price and option data, with exogenous measures of R&D capital stocks derived from panel variation in state R&D tax credits. We also rule out a number of potentially competing explanations for our results, including firm-level differences in lumpiness of investments, financial frictions, lifecycle growth opportunities or moral hazard-implied asset substitution or risk shifting.
ISSN:0929-1199
1872-6313
DOI:10.1016/j.jcorpfin.2021.102130