R&D investment and systematic risk

The present study investigates the relationship between a firm's R&D intensity and the risk of its common stock, by analysing a sample of firms which are more profitable, larger in market capitalization and more R&D intensive than the universe of US‐listed firms. The results from the po...

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Bibliographic Details
Published in:Accounting and finance (Parkville) 2004-11, Vol.44 (3), p.393-418
Main Authors: Ho, Yew Kee, Xu, Zhenyu, Yap, Chee Meng
Format: Article
Language:English
Subjects:
Correlation analysis
Economic models
Financial leverage
Manufacturing
Monte Carlo simulation
Operating leverage
R&D
Research & development
Risk assessment
Stock prices
Studies
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Summary:The present study investigates the relationship between a firm's R&D intensity and the risk of its common stock, by analysing a sample of firms which are more profitable, larger in market capitalization and more R&D intensive than the universe of US‐listed firms. The results from the portfolio analysis, Monte Carlos simulations and correlation analysis of our sample show that: (i) R&D intensity is positively related to systematic risk in the stock market; (ii) the greater systematic risk is largely attributable to the greater intrinsic business risk and the greater operating risk of R&D‐intensive firms; (iii) R&D‐intensive firms carry marginally less financial leverage but they do not differ from other firms in terms of operating leverage; and (iv) our results are particularly strong in the manufacturing sector. For the non‐manufacturing sector, the results are not robust for different study periods.
ISSN:0810-5391
1467-629X
DOI:10.1111/j.1467-629x.2004.00116.x