Review of Financial Studies Vol. 24 No. 9 2011
Financial Constraints, R&D Investment, and Stock Returns
Abstract
Through the interaction between financial constraints and R&D, I study two asset-pricing 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. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: [email protected]., Oxford University Press.
- DOI
- 10.1093/rfs/hhr043
- Volume
- 24
- Issue
- 9
- Pages
- 2974-3007
- Language
- en
- Sources
- openalex crossref