Innovative efficiency and stock returns

Abstract

This paper establishes a strong relation between technology competition and corporate bankruptcy. Using detailed firm-level patent data we show that: 1) the capability of firms to innovate predicts future bankruptcies better than the typical measures such as Z-score and credit rating, 2) technology-related bankruptcies are less sensitive to the business cycle and industry success, and 3) firms that go bankrupt as a result of technology competition experience larger declines in earnings and stock prices.

R&D Investment and Market Reactions in Non-crisis and Crisis Periods: Evidence from Taiwan

“…First, our results show that no R&D firms are undervalued possibly due to their low growth potential in the non-crisis period, while high R&D firms might be mispriced due to the higher level of information asymmetry in the crisis period. Prior literature proposes that investors' limited attention and psychological constraints may cause mispricing of technology stocks (Chan et al, 2001;Hirshleifer et al, 2013). Our findings provide additional evidence that investors might have different reference point to evaluate no R&D and R&D intensive firms.…”

“…However, the findings in Table 3, contrast to those obtained in Western economies, show that high R&D firms are undervalued much more than no R&D firms (Hirshleifer, et al, 2013;Chan et al, 2001). We provide two possible explanations for this.…”

“…R&D intensive firms are thus considered as having a greater chance of insider trading and earnings management than low R&D firms (Morck, Yeung, & Yu, 2000). As a result, it has been claimed that the difficulties with regard to pricing and information asymmetry due to these characteristics are likely to cause undervaluation of R&D stocks (Chan et al, 2001;Hirshleifer et al, 2013).…”

“…Although the literature shows that R&D investment can enhance a firm's competitive ability and thus have a positive influence on firm performance (Grilichies, 1984;Chauvin & Hirschey, 1993;Bae & Kim, 2003), recent studies propose that investors may underestimate the value of technology stocks (Eberhart, Maxwell, & Siddique, 2004;Hirshleifer, Hsu, & Li, 2013). …”

“…Moreover, Chan, Lakonishok, & Sougiannis (2001) point out that underpricing may arise because accounting rules cannot fully reflect the value of R&D projects. As a result, market imperfections and investors' psychological constraints induce sluggish short-term stock price reactions to innovative firms (Hirshleifer et al, 2013). This study examines whether R&D investment in an uncertain environment, such as the global financial crisis period of 2008, will aggravate information asymmetry and the extent to which investors underestimate the value of R&D stocks.…”