Research and Development and Firm Risk

Journal of Corporate Finance Research, Vol. 9, No. 3, pp. 7-26, 2015

20 Pages Posted: 20 Nov 2017

See all articles by Peter P.M. Smid

Peter P.M. Smid

University of Groningen - Faculty of Economics and Business

J. Henk von Eije

University of Groningen - Faculty of Economics and Business

Matthijs Suurmeijer

University of Groningen - Faculty of Economics and Business

Multiple version iconThere are 2 versions of this paper

Date Written: 2015

Abstract

Spending on R&D has grown faster than other investments. This may result in higher return and higher risk. We focus on the latter and examine how research and development (R&D) affects the risks of US firms. We analyze the impact on the firm’s beta, its systematic and idiosyncratic risk, and the combination of the latter two (total risk). Because investors prefer upside to downside risk, we also analyze whether downside risk is also influenced by R&D. We use panel and quantile regressions and control for dividend payouts, growth, leverage, asset liquidity, firm size, earnings variability, firm age and industry competition. We then show that the impact is positive and highly significant for beta, systematic risk and total risk. The impact on systematic risk contrasts to the finding by McAlister et al. (2007) who find that R&D insulates firms from market downturns and thereby lowers systematic risk. The increases in risks are, moreover, stronger at higher relative levels of R&D spending. Unfortunately for investors, downside risk is also increasing with relative R&D spending. The latter result makes it more difficult for managers to defend R&D investments: while R&D may indeed generate future returns it also adds to the next year’s downside risk of investors.

Keywords: R&D, Beta, Systematic Risk, Idiosyncratic Risk, Total Risk, Downside Risk

JEL Classification: G12, G14, G32

Suggested Citation

Smid, Peter P.M. and von Eije, J. Henk and Suurmeijer, Matthijs, Research and Development and Firm Risk (2015). Journal of Corporate Finance Research, Vol. 9, No. 3, pp. 7-26, 2015, Available at SSRN: https://ssrn.com/abstract=3064344

Peter P.M. Smid (Contact Author)

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands

J. Henk Von Eije

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands

Matthijs Suurmeijer

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands

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