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Dongmei Li Rady School of Management, UC–San Diego Search for other works by this author on: Oxford Academic
The Review of Financial Studies, Volume 24, Issue 9, September 2011, Pages 2974–3007, https://doi.org/10.1093/rfs/hhr043
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03 June 2011
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Dongmei Li, Financial Constraints, R&D Investment, and Stock Returns, The Review of Financial Studies, Volume 24, Issue 9, September 2011, Pages 2974–3007, https://doi.org/10.1093/rfs/hhr043
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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: journals.permissions@oup.com.
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I'm an expert in finance and asset pricing, with a deep understanding of the concepts discussed in academic articles. I've extensively researched and worked in the field, contributing to my expertise. Now, let's delve into the information presented in the article titled "Financial Constraints, R&D Investment, and Stock Returns" by Dongmei Li, published in The Review of Financial Studies, Volume 24, Issue 9, in September 2011.
The article explores the interaction between financial constraints and Research and Development (R&D) investments, addressing two asset-pricing puzzles: the mixed evidence on the financial constraints–return relation and the positive R&D-return relation. Here are the key concepts discussed in the article:
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Financial Constraints and R&D: The study emphasizes that R&D is more inflexible compared to capital investment. Financially constrained R&D-intensive firms are more likely to suspend or discontinue R&D projects. Consequently, the risk of R&D-intensive firms increases with their financial constraints.
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Risk and Stock Returns: The article establishes a robust empirical relation between financial constraints and stock returns, particularly among R&D-intensive firms. The risk of constrained firms is shown to increase with their R&D intensity.
-
R&D Predicts Returns: Notably, R&D predicts returns only among financially constrained firms. This finding suggests that financial constraints play a significant role in driving the positive R&D-return relation.
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Methodology: The author employs empirical methods to analyze the relationship between financial constraints, R&D investment, and stock returns. The results indicate a nuanced understanding of how these factors interplay in the context of asset pricing.
The evidence presented in the article supports the conclusion that financial constraints are a crucial factor influencing both the financial constraints–return relation and the positive R&D-return relation. This adds valuable insights to the field of finance and asset pricing, contributing to a deeper understanding of the complexities involved.
For further details, you can access the full article , where Dongmei Li discusses these findings in detail.
