R&D Effects, Risks and Strategic Decisions: Evidence from Listed Firms in R&D-intensive Countries
Purpose. The purpose of this research is to look at effects of research and development expenditures (R&D) on value and risks of publicly traded companies by studying returns on stock exchanges of R&D-intensive economies (Republic of Korea, Finland, and Israel). Design/Methodology/Approach. Empirical tests of multifactor asset pricing models were applied in order to demonstrate that R&D intensity could be considered a pricing factor and affect investors’ risk premiums on those markets. In order to discover the reasons behind the asset pricing R&D anomaly, we investigated the nature of R&D risk further by looking into the interactions of R&D and currency risks. Findings. We discover that investors in stock markets of R&D-intensive countries should require a positive equity risk premium. However, the reduction of R&D intensity may increase firm’s risks and firms with higher R&D-intensity are less exposed to currency risks in R&Dintensive economies. Originality/value. Many researchers have investigated the relationship between a firm’s R&D and stock returns. But nearly all of them focus on the U.S. stock market and attempt to determine the reasons for R&D’s impact on firms’ risks and market value. Meanwhile, the role of R&D and related risks for investors could be even more prominent for stock markets in R&D intensive countries. In order to bridge this gap, we study stock returns on exchanges of three developed countries where the ratio of Gross domestic expenditure on R&D (GERD) to GDP is among the highest worldwide. We adopted the methodology of asset pricing empirical studies and developed it further to analyze the causes of R&D risks. The new methodology was applied to discover relationship between R&D intensity and currency risk exposure. Our interesting findings could be used for development of firm’s corporate strategies in those countries and for elaboration of policy decisions.