Differential Stock Market Reactions to R&D Leaders and Followers
Asian Tax Journal Vol. 13 No. 3 (2012), pp. 171-189
Abstract
Under the conservative accounting standard, most R&D expenditure is expended as it incurred,although it is provable to generate an intangible asset in the future. As a result, the accounting information and related financial ratio, such as market to book ratio and price－earnings ration, for the firms with higher R&D intensity may be misstated. Due to the limited usefulness of R&D information, the market may not impound the value of the R&D efficiently. Chan et al.(2001) provided the evidence that the portfolio with highest R&D intensity shows abnormal returns not in the expended year but in subsequent years, and argued it as market inefficiency on the R&D information. In an efficient market, there is no association between R&D intensity and future stock returns. This paper extended Chan et al.(2001)’s study by reclassifying portfolios into R&D leaders and followers based on the resources－based view(Barney, 1991). We hypothesize that the market will react instantly and positively to the well organized leaders who invest on R&D activity generating more value, rarity and imperfectly imitability. The results are summarized as follows. First, consistent with our hypothesis, the leader shows the positive abnormal return in the expended year. Second, the leader shows the positive abnormal return for subsequent three years. Third, the follower shows the negative abnormal return for subsequent three years. Our results suggest that the market reacts efficiently to the R&D leader and follower, and the leader firms perform better consistent with the resource－based view.
Keywords
- R&D intensity
- R&D leaders and followers
- resource－based view
- abnormal return
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