R&D Investment and Stock Returns: Evidence from China

Using a sample of Chinese listed firms with non-missing R&D expenditures from 2007 to 2018, this study investigates the relation between R&D investment and future stock returns in the Chinese stock market by portfolio-level analyses and firm-level Fama-MacBeth cross-sectional regressions. The results show that the relation between R&D investment and future stock returns is positive and statistically significant in the Chinese stock market. The positive R&D-return relation is robust to control for firm size, book-to-market ratio, asset growth, profitability, and state-owned enterprise ownership, as well as industry fixed effect. Consistent with the evidence in U.S. and European market, this finding supplements the study of R&D valuation by providing the empirical evidence in a major emerging and transition economy. Additionally, the results from univariate regressions show that among R&D-active firms, the value effect is insignificant, while the investment and state-owned ownership effect are more pronounced.