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Research and Development Activity and Expected Returns in the United Kingdom

Research and Development Activity and Expected Returns in the United Kingdom Fama and French (1992) show that size and book-to-price dominate CAPM beta and other variables such as the price-earnings ratio and dividend yield in explaining the cross-section of US stock returns. Comparable evidence for the UK points to a book-to-price effect, but not a size effect (Chan and Chui, 1996; Strong and Xu, 1997). In this paper, our first contribution is to show that a measure of research and development (RD) helps explain cross-sectional variation in UK stock returns. Our cross-sectional results on the association between stock returns and RD are consistent with recent US evidence reported by Lev and Sougiannis (1996, 1999) and Chan, Lakonishok and Sougiannis (2001).Fama and French (1993, 1995, 1996) also show that a three-factor model captures a high proportion of the time series variation in portfolio returns, again for the US. Our second contribution is to show, for the UK, that a modification to the three-factor model to take account of RD activity can significantly enhance the explanatory power of the three-factor model. We show that, as a practical matter, estimated risk premia based on the modified three-factor model can differ considerably from risk premia estimated using the CAPM or the three-factor model. In particular, risk premia for industries in which few firms undertake RD activities tend to be over-estimated. © Kluwer Academic Publishers « Previous | Next Article » Table of Contents This Article European Finance Review (2003) 7 (1): 27-46. doi: 10.1023/A:1022504029943 » Abstract Free Full Text (PDF) Free Classifications Article Services Article metrics Alert me when cited Alert me if corrected Find similar articles Similar articles in Web of Science Add to my archive Download citation Request Permissions Citing Articles Load citing article information Citing articles via CrossRef Citing articles via Scopus Citing articles via Web of Science Citing articles via Google Scholar Google Scholar Articles by Al-Horani, A. Articles by Stark, A. W. Search for related content Related Content Load related web page information Share Email this article CiteULike Delicious Facebook Google+ Mendeley Twitter What's this? Search this journal: Advanced » Current Issue October 2015 19 (6) Alert me to new issues The Journal About the journal Rights & Permissions We are mobile – find out more This journal is a member of the Committee on Publication Ethics (COPE) Journals Career Network Published on behalf of European Finance Association Purchase membership to the European Finance Association Impact Factor: 2.012 5-Yr impact factor: 2.384 Read the top cited papers Editor Franklin Allen Wharton School, USA View full editorial board For Authors Services for authors Instructions to authors Author Self Archiving Policy Open access options for authors - visit Oxford Open Speed of Review P56qQ0myhZIZ9qtHtIIeI0jcYDo8lVt6 true Looking for your next opportunity? Looking for jobs... jQuery_1_11 = jQuery.noConflict(true); Corporate Services What we offer Advertising sales Reprints Supplements Alerting Services Email table of contents Email Advance Access CiteTrack XML RSS feed var taxonomies = ("LAW00270", "SOC00970", "SOC01040"); Most Most Read Bubbling with Excitement: An Experiment Do Stock-Financed Acquisitions Destroy Value? New Methods and Evidence Information Asymmetry, Information Precision, and the Cost of Capital Monetary Policy, Risk-Taking, and Pricing: Evidence from a Quasi-Natural Experiment Exporting Sovereign Stress: Evidence from Syndicated Bank Lending during the Euro Area Sovereign Debt Crisis » View all Most Read articles Most Cited Equity Portfolio Diversification Liquidity Black Holes Venture Capital Finance: A Security Design Approach Bankruptcy Prediction with Industry Effects The World of Cross-Listings and Cross-Listings of the World: Challenging Conventional Wisdom » View all Most Cited articles Disclaimer: Please note that abstracts for content published before 1996 were created through digital scanning and may therefore not exactly replicate the text of the original print issues. All efforts have been made to ensure accuracy, but the Publisher will not be held responsible for any remaining inaccuracies. If you require any further clarification, please contact our Customer Services Department. 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Research and Development Activity and Expected Returns in the United Kingdom

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References (17)

Publisher
Oxford University Press
Copyright
Copyright © 2015 European Finance Association
ISSN
1572-3097
eISSN
1573-692X
DOI
10.1023/A:1022504029943
Publisher site
See Article on Publisher Site

Abstract

Fama and French (1992) show that size and book-to-price dominate CAPM beta and other variables such as the price-earnings ratio and dividend yield in explaining the cross-section of US stock returns. Comparable evidence for the UK points to a book-to-price effect, but not a size effect (Chan and Chui, 1996; Strong and Xu, 1997). In this paper, our first contribution is to show that a measure of research and development (RD) helps explain cross-sectional variation in UK stock returns. Our cross-sectional results on the association between stock returns and RD are consistent with recent US evidence reported by Lev and Sougiannis (1996, 1999) and Chan, Lakonishok and Sougiannis (2001).Fama and French (1993, 1995, 1996) also show that a three-factor model captures a high proportion of the time series variation in portfolio returns, again for the US. Our second contribution is to show, for the UK, that a modification to the three-factor model to take account of RD activity can significantly enhance the explanatory power of the three-factor model. We show that, as a practical matter, estimated risk premia based on the modified three-factor model can differ considerably from risk premia estimated using the CAPM or the three-factor model. In particular, risk premia for industries in which few firms undertake RD activities tend to be over-estimated. © Kluwer Academic Publishers « Previous | Next Article » Table of Contents This Article European Finance Review (2003) 7 (1): 27-46. doi: 10.1023/A:1022504029943 » Abstract Free Full Text (PDF) Free Classifications Article Services Article metrics Alert me when cited Alert me if corrected Find similar articles Similar articles in Web of Science Add to my archive Download citation Request Permissions Citing Articles Load citing article information Citing articles via CrossRef Citing articles via Scopus Citing articles via Web of Science Citing articles via Google Scholar Google Scholar Articles by Al-Horani, A. Articles by Stark, A. W. Search for related content Related Content Load related web page information Share Email this article CiteULike Delicious Facebook Google+ Mendeley Twitter What's this? Search this journal: Advanced » Current Issue October 2015 19 (6) Alert me to new issues The Journal About the journal Rights & Permissions We are mobile – find out more This journal is a member of the Committee on Publication Ethics (COPE) Journals Career Network Published on behalf of European Finance Association Purchase membership to the European Finance Association Impact Factor: 2.012 5-Yr impact factor: 2.384 Read the top cited papers Editor Franklin Allen Wharton School, USA View full editorial board For Authors Services for authors Instructions to authors Author Self Archiving Policy Open access options for authors - visit Oxford Open Speed of Review P56qQ0myhZIZ9qtHtIIeI0jcYDo8lVt6 true Looking for your next opportunity? Looking for jobs... jQuery_1_11 = jQuery.noConflict(true); Corporate Services What we offer Advertising sales Reprints Supplements Alerting Services Email table of contents Email Advance Access CiteTrack XML RSS feed var taxonomies = ("LAW00270", "SOC00970", "SOC01040"); Most Most Read Bubbling with Excitement: An Experiment Do Stock-Financed Acquisitions Destroy Value? New Methods and Evidence Information Asymmetry, Information Precision, and the Cost of Capital Monetary Policy, Risk-Taking, and Pricing: Evidence from a Quasi-Natural Experiment Exporting Sovereign Stress: Evidence from Syndicated Bank Lending during the Euro Area Sovereign Debt Crisis » View all Most Read articles Most Cited Equity Portfolio Diversification Liquidity Black Holes Venture Capital Finance: A Security Design Approach Bankruptcy Prediction with Industry Effects The World of Cross-Listings and Cross-Listings of the World: Challenging Conventional Wisdom » View all Most Cited articles Disclaimer: Please note that abstracts for content published before 1996 were created through digital scanning and may therefore not exactly replicate the text of the original print issues. All efforts have been made to ensure accuracy, but the Publisher will not be held responsible for any remaining inaccuracies. If you require any further clarification, please contact our Customer Services Department. Online ISSN 1573-692X - Print ISSN 1572-3097 Copyright © 2015 European Finance Association Oxford Journals Oxford University Press Site Map Privacy Policy Cookie Policy Legal Notices Frequently Asked Questions Other Oxford University Press sites: Oxford University Press Oxford Journals China Oxford Journals Japan Academic & Professional books Children's & Schools Books Dictionaries & Reference Dictionary of National Biography Digital Reference English Language Teaching Higher Education Textbooks International Education Unit Law Medicine Music Online Products & Publishing Oxford Bibliographies Online Oxford Dictionaries Online Oxford English Dictionary Oxford Language Dictionaries Online Oxford Scholarship Online Reference Rights and Permissions Resources for Retailers & Wholesalers Resources for the Healthcare Industry Very Short Introductions World's Classics function fnc_onDomLoaded() { var query_context = getQueryContext(); PF_initOIUnderbar(query_context,":QS:default","","JRN"); PF_insertOIUnderbar(0); }; if (window.addEventListener) { window.addEventListener('load', fnc_onDomLoaded, false); } else if (window.attachEvent) { window.attachEvent('onload', fnc_onDomLoaded); } var gaJsHost = (("https:" == document.location.protocol) ? "https://ssl." : "http://www."); document.write(unescape("%3Cscript src='" + gaJsHost + "google-analytics.com/ga.js' type='text/javascript'%3E%3C/script%3E")); try { var pageTracker = _gat._getTracker("UA-189672-16"); pageTracker._setDomainName(".oxfordjournals.org"); pageTracker._trackPageview(); } catch(err) {}

Journal

Review of FinanceOxford University Press

Published: Jan 1, 2003

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