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Corporate R&D spending, subsidies and stock market reactions to seasoned equity offering announcements: evidence from China

Xin Xiang (Shenzhen Audencia Business School, Shenzhen University, Shenzhen, China) (School of Business, Macau University of Science and Technology, Macau, China)

International Journal of Emerging Markets

ISSN: 1746-8809

Article publication date: 10 March 2022

Issue publication date: 5 December 2023

209

Abstract

Purpose

This study focuses on an emerging market, China, and investigates the effects of corporate research and development (R&D) spending and subsidies on stock market reactions to seasoned equity offering (SEO) announcements.

Design/methodology/approach

The study uses a sample of SEOs announced over the period of 2003–2018 in the Chinese A-share market. The cumulative abnormal stock returns (CARs) are adopted to measure the stock market response to SEOs. The R&D spending-to-sales ratio (R&D subsidies) in 2 years before SEO announcements is used to measure the pre-SEO R&D spending (R&D subsidies). The instrumental variable (IV) regression method is applied to address the endogeneity problem in the robustness test.

Findings

This study demonstrates that firms with high R&D spending suffer stock overpricing and experience a negative market reaction when they announce SEOs, but R&D subsidies alleviate stock overpricing and mitigate the negative relationship between R&D spending and SEO market reactions.

Originality/value

Although the prior studies have demonstrated that information asymmetry, which causes stock overpricing, explains negative stock market reactions to SEOs, it is unclear if a certain factor that causes information asymmetry affects SEO market reactions. This study fills this gap and focuses on R&D spending, demonstrating that R&D spending is negatively related to SEO performance.

Keywords

Citation

Xiang, X. (2023), "Corporate R&D spending, subsidies and stock market reactions to seasoned equity offering announcements: evidence from China", International Journal of Emerging Markets, Vol. 18 No. 11, pp. 5380-5407. https://doi.org/10.1108/IJOEM-06-2021-0916

Publisher

:

Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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