Illiquidity, R&D Investment, and Stock Returns

Ahmed, Shamim; Bu, Ziwen; Ye, Xiaoxia

Abstract

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.

Citation

Ahmed, S., Bu, Z., & Ye, X. (2023). Illiquidity, R&D Investment, and Stock Returns. Journal of Money, Credit and Banking, https://doi.org/10.1111/jmcb.13053

• Journal Article Type: Article
• Acceptance Date: Jul 11, 2002
• Online Publication Date: Apr 9, 2023
• Publication Date: Apr 9, 2023
• Deposit Date: Mar 20, 2025
• Publicly Available Date: Mar 20, 2025
• Journal: Journal of Money, Credit and Banking
• Print ISSN: 0022-2879
• Electronic ISSN: 1538-4616
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• DOI: https://doi.org/10.1111/jmcb.13053
• Keywords: illiquidity, research and development investment, risk premium, stock returns
• Public URL: https://nottingham-repository.worktribe.com/output/45437321
• Publisher URL: https://onlinelibrary.wiley.com/doi/10.1111/jmcb.13053