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

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.

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