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Financial constraints, R&D investment, and stock returns (2011)
| Citations: | 15 - 2 self |
BibTeX
@MISC{Li11financialconstraints,,
author = {Dongmei Li},
title = {Financial constraints, R&D investment, and stock returns },
year = {2011}
}
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Abstract
Through the interaction between financial constraints and R&D, I study two assetpricing puzzles: mixed evidence on the financial constraints–return relation and the positive R&D-return relation. Unlike capital investment, R&D is more inflexible. A financially constrained R&D-intensive firm is more likely to suspend/discontinue R&D projects. Therefore, R&D-intensive firms ’ risk increases with their financial constraints. Conversely, constrained firms’ risk increases with their R&D intensity. I find a robust empirical relation between financial constraints and stock returns, primarily among R&D-intensive firms. Moreover, R&D predicts returns only among financially constrained firms. This evidence suggests that financial constraints potentially drive the positive R&D-return relation.
