Size and value effects in high-tech industries: The role of R&D investment

Lin Yu; Xiaoqua Liu; Hung Gay Fung; Wai Kin Leung

doi:10.1016/j.najef.2018.10.001

Size and value effects in high-tech industries: The role of R&D investment

Lin Yu, Xiaoqua Liu, Hung Gay Fung, Wai Kin Leung

University of Missouri-St. Louis

Research output: Contribution to journal › Article › peer-review

Abstract

We use monthly US stock data over 55 years from 1962 to 2017 to show that the R&D intensity at firms adds another important dimension to the size and value effects in describing stock returns , especially for small high-tech firms. A trading strategy that double sorts on R&D intensity and size or book-to-market ratio outperforms a simple small-minus-big (SMB) or high-minus-low (HML) strategy in producing higher and more significant portfolio returns. The most profitable schemes involve triple sorts by size, BM, and R&D intensity: the payoffs of buying high-BM/R&D-Active portfolio and selling low-BM/R&D-Inactive portfolio in the small-size/high-tech group and that of buying high-tech/high-BM and selling low-tech/low-BM in the small-size/R&D-active group generate a return of more than 2% on a monthly basis. Our results are robust to alternative classification method of assigning stocks in portfolios.

Original language	American English
Journal	The North American Journal of Economics and Finance
Volume	51
DOIs	https://doi.org/10.1016/j.najef.2018.10.001
State	Published - Jan 2020

Keywords

High-tech industry
Portfolio construction
R&D intensity
Risk and return

Disciplines

Business

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@article{68524d579d024f148a04e2f86304e379,

title = "Size and value effects in high-tech industries: The role of R&D investment",

abstract = " We use monthly US stock data over 55 years from 1962 to 2017 to show that the R&D intensity at firms adds another important dimension to the size and value effects in describing stock returns , especially for small high-tech firms. A trading strategy that double sorts on R&D intensity and size or book-to-market ratio outperforms a simple small-minus-big (SMB) or high-minus-low (HML) strategy in producing higher and more significant portfolio returns. The most profitable schemes involve triple sorts by size, BM, and R&D intensity: the payoffs of buying high-BM/R&D-Active portfolio and selling low-BM/R&D-Inactive portfolio in the small-size/high-tech group and that of buying high-tech/high-BM and selling low-tech/low-BM in the small-size/R&D-active group generate a return of more than 2% on a monthly basis. Our results are robust to alternative classification method of assigning stocks in portfolios. ",

keywords = "High-tech industry, Portfolio construction, R&D intensity, Risk and return",

author = "Lin Yu and Xiaoqua Liu and Fung, {Hung Gay} and Leung, {Wai Kin}",

note = "We use monthly US stock data over 55 years from 1962 to 2017 to show that the R&D intensity at firms adds another important dimension to the size and value effects in describing stock returns, especially for small high-tech firms. A trading strategy that double sorts on R&D intensity and size or book-to-market ratio outperforms a simple small-minus-big (SMB) or high-minus-low (HML) strategy in producing higher and more significant portfolio returns.",

year = "2020",

month = jan,

doi = "10.1016/j.najef.2018.10.001",

language = "American English",

volume = "51",

journal = "The North American Journal of Economics and Finance",

}

TY - JOUR

T1 - Size and value effects in high-tech industries: The role of R&D investment

AU - Yu, Lin

AU - Liu, Xiaoqua

AU - Fung, Hung Gay

AU - Leung, Wai Kin

N1 - We use monthly US stock data over 55 years from 1962 to 2017 to show that the R&D intensity at firms adds another important dimension to the size and value effects in describing stock returns, especially for small high-tech firms. A trading strategy that double sorts on R&D intensity and size or book-to-market ratio outperforms a simple small-minus-big (SMB) or high-minus-low (HML) strategy in producing higher and more significant portfolio returns.

PY - 2020/1

Y1 - 2020/1

N2 - We use monthly US stock data over 55 years from 1962 to 2017 to show that the R&D intensity at firms adds another important dimension to the size and value effects in describing stock returns , especially for small high-tech firms. A trading strategy that double sorts on R&D intensity and size or book-to-market ratio outperforms a simple small-minus-big (SMB) or high-minus-low (HML) strategy in producing higher and more significant portfolio returns. The most profitable schemes involve triple sorts by size, BM, and R&D intensity: the payoffs of buying high-BM/R&D-Active portfolio and selling low-BM/R&D-Inactive portfolio in the small-size/high-tech group and that of buying high-tech/high-BM and selling low-tech/low-BM in the small-size/R&D-active group generate a return of more than 2% on a monthly basis. Our results are robust to alternative classification method of assigning stocks in portfolios.

AB - We use monthly US stock data over 55 years from 1962 to 2017 to show that the R&D intensity at firms adds another important dimension to the size and value effects in describing stock returns , especially for small high-tech firms. A trading strategy that double sorts on R&D intensity and size or book-to-market ratio outperforms a simple small-minus-big (SMB) or high-minus-low (HML) strategy in producing higher and more significant portfolio returns. The most profitable schemes involve triple sorts by size, BM, and R&D intensity: the payoffs of buying high-BM/R&D-Active portfolio and selling low-BM/R&D-Inactive portfolio in the small-size/high-tech group and that of buying high-tech/high-BM and selling low-tech/low-BM in the small-size/R&D-active group generate a return of more than 2% on a monthly basis. Our results are robust to alternative classification method of assigning stocks in portfolios.

KW - High-tech industry

KW - Portfolio construction

KW - R&D intensity

KW - Risk and return

UR - https://www.sciencedirect.com/science/article/abs/pii/S106294081830189X?via%3Dihub

U2 - 10.1016/j.najef.2018.10.001

DO - 10.1016/j.najef.2018.10.001

M3 - Article

VL - 51

JO - The North American Journal of Economics and Finance

JF - The North American Journal of Economics and Finance

ER -

Size and value effects in high-tech industries: The role of R&D investment

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