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Investor reaction to R&D investment: Are new product announcements and development capacity missing links?

Xin Li (School of Management, Harbin Institute of Technology, Harbin, China)
Tienan Wang (School of Management, Harbin Institute of Technology, Harbin, China)

International Journal of Innovation Science

ISSN: 1757-2223

Article publication date: 6 June 2016

Abstract

Purpose

This paper aims to examine the impact of research and development (R&D) investment on firms’ stock price from the perspective of investors.

Design/methodology/approach

Building on signaling theory, the authors propose that R&D investment sends important signals to the investment community regarding future growth, which in turn impacts investor reaction to such investment.

Findings

Using a sample of listed pharmaceutical firms in China from 2007 to 2011, the authors find that R&D investment has a positive effect on firms’ stock price, indicating that investors have a positive reaction to R&D investment signals. Further, the authors find that the signaling role of new product announcements mediates this relationship between R&D investment and investor reaction.

Originality/value

The authors also find that the signaling role of development capacity (DC) has a moderating effect on the relationship between innovation activities (i.e. R&D investment and new product announcements) and investor reaction, such that DC strengthens the positive effect of R&D and new product announcements on investors.

Keywords

Acknowledgements

The work was supported by National Natural Science Foundation of China under Grant No. 71031003.

Citation

Li, X. and Wang, T. (2016), "Investor reaction to R&D investment: Are new product announcements and development capacity missing links?", International Journal of Innovation Science, Vol. 8 No. 2, pp. 133-147. https://doi.org/10.1108/IJIS-06-2016-009

Publisher

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Emerald Group Publishing Limited

Copyright © 2016, Emerald Group Publishing Limited