Over-Investment And Increased Risk-Taking In Corporate R&D?

Some scholars argue there is under-investment in corporate R&D; however, Jensen (1993) argues some R&D projects are not profitable and investors often overlook that fact. Consistent with this latter argument, the authors find large-size firms which acquire technologies from external sources or which significantly increase their R&D expenditures experience subsequent negative three-year-long abnormal stock returns on the magnitude of 74 and 56 basis-points per month, respectively. The large-size technology-acquirers experience also an increase in their cost of equity on the magnitude of 21 basis-points per month due to an increase in their systematic risk. They find no robust evidence of significant event-induced abnormal returns or systematic risk changes for the small-size sample firms.