THE EFFECTS OF R&D EXPENDITURE AND PATENTS ON SYSTEMATIC, IDIOSYNCRATIC AND STOCK PRICE CRASH RISK

Abstract

This study presents three different distinct views of risk – systematic, idiosyncratic and stock price crash – and its connection to innovation. This study finds that: (i) R&D intensive firms tend to have higher risk profiles in all three areas, despite controlling for firm specific returns and return on asset; (ii) on the other hand, firms with more patents granted tend to have lower risk profile in all three areas. This result is interesting as it offers insight into the differences between the proxies of innovation – investment and result – on the three different risk facets. The results of this study suggest that investors react to patent grant information and, thus, give strength to information theory and support active disclosure of patent statuses as well as an environment with strong intellectual property rights. Also pertinent to investigation of innovative activities are the effects of firms with missing R&D expenditure. The results of stock price crash risk show that there are significant differences between firms with missing and zero R&D. This suggests that firms with missing R&D might have important implications on stock price crash risk, possibly due to the withholding of important indicators of risk and bad news.