The R&D Premium and Takeover Risk
Lin, Ji-Chai, Wang, Yanzhi (Andrew)
The Accounting Review · 2016 · Volume 91 · Issue 3
Abstract
To explain why firms with high research and development (R&D) intensity offer their investors higher stock returns, we argue that (1) high R&D capacity relative to firm valuation makes R&D-intensive firms attractive takeover targets, and that (2) the higher takeover probability leads their investors to face higher takeover risk, as proposed byCremers, Nair, and John (2009), and require higher returns. We find evidence consistent with our hypothesis. Furthermore, we find that takeover probability also relates to large R&D increases, but not to innovation efficiency. Accordingly, we expect and find that takeover risk helps to explain the premium associated with large R&D increases, but not the innovation efficiency premium previously documented. JEL Classifications:G12; O31.
Keywords
R&D, takeover risk, risk premium
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