R&D information quality and stock returns

Investors demand higher premiums from firms whose future R&D performance is difficult to evaluate. We construct a measure of R&D information quality (RDIQ) by linking a firm's historical innovation input (R&D expenditures) and innovation outcome (sales) and find significant evidence that expected excess returns decrease with RDIQ. We find that the high-minus-low RDIQ hedge portfolio earns excess returns of -23(-25) bps per month in value-weighted (equal-weighted) returns. We also find that the RDIQ effect is weakly correlated with commonly used risk factors, is stronger for firms with greater uncertain business environment, and exhibits incremental pricing power. (C) 2020 Elsevier B.V. All rights reserved.