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R&D investment intensity and jump volatility of stock price

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Abstract

This paper studies the important but unexplored relationship between R&D investment intensity and different components of stock price volatility. The total volatility of stock price is decomposed into a continuous component and a jump component. We find that firms with higher R&D investment intensity have less jump volatility of stock price. We explain the findings through a channel of stock liquidity and information disclosure. We argue that R&D-intensive firms prefer higher stock liquidity, and empirically document that they achieve higher stock liquidity by actively releasing R&D information. We apply a textual analysis technique and show that R&D-intensive firms voluntarily disclose more R&D information in 10-K, 10-Q and 8-K filings, resulting in higher stock liquidity and hence less jump volatility of stock price. The negative relationship between R&D investment intensity and jump volatility of stock price is more pronounced for financially constrained firms, which have stronger incentives to release R&D information and hence increase stock liquidity. Propensity-score matching approach and instrumental variable approach are used to address endogeneity. A rich set of robustness tests are conducted to confirm the findings.

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Notes

  1. Empirical literature shows evidence that liquid stocks reduce the cost of equity financing (Lambert et al. 2007; Verrecchia 2001), facilitate the entry of blockholder investors (Maug 1998), benefit stock-compensated managers (Bazjak et al. 1993), make the stock market information transparent and facilitate the information-gathering mechanism (Chen et al. 2007; Dass et al. 2014).

  2. The original values of realized variation and bipower variation are listed in the descriptive statistics to make them more intuitive.

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Authors and Affiliations

  1. Fox School of Business, Temple University, Philadelphia, PA, USA

    Cheng Jiang & David Larsen

  2. Stern School of Business, New York University, New York, NY, USA

    Kose John

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  1. Cheng Jiang
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Correspondence to Cheng Jiang.

Additional information

We thank Cheng-Few Lee (the editor) and two anonymous reviewers for helpful comments. We thank Alex Edmans, Philip English, Matthias Fleckenstein, Gerard Hoberg, Victoria Ivashina, Yuanzhi Li, Liyan Liang, Yi Liang, Lalitha Naveen, Jay Ritter, Oleg Rytchkov, Pavel Savor for their helpful suggestions. We are also grateful for the comments from discussants and participants of 2018 Eastern Finance Association annual conference, seminar at Tsinghua University, 2019 China International Conference of Finance, 2019 World Finance Conference, and 2019 Financial Management Association Annual Conference. This paper was written when David Larsen was an undergraduate student at Fox School of Business of Temple University.

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Jiang, C., John, K. & Larsen, D. R&D investment intensity and jump volatility of stock price. Rev Quant Finan Acc 57, 235–277 (2021). https://doi.org/10.1007/s11156-020-00944-3

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