Illiquidity, R&D investment, and stock returns

Shamim Ahmed*, Ziwen Bu, Xiaoxia Ye*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

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We propose a dynamic model of research and development (R&D) venture, which predicts that the positive relation between the firm's R&D investment and the expected stock returns strengthens with illiquidity. Consistent with the model's prediction, empirical evidence based on cross-sectional regressions and double-sorted portfolios largely suggests a stronger and positive R&D–return relation among illiquid stocks. A further analysis shows that the important role of illiquidity in the R&D–return relation cannot be explained by factors, such as financial constraints, innovation ability, and product market competition. Collectively, our results suggest that stock illiquidity is an independent driver of the R&D premium.
Original languageEnglish
JournalJournal of Money, Credit and Banking
Early online date9 Apr 2023
Publication statusE-pub ahead of print - 9 Apr 2023

Bibliographical note

Not yet published as of 06/04/2023.


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