The R&D anomaly: risk or mispricing?

Leung, Woon ORCID: https://orcid.org/0000-0002-0389-2126, Evans, Kevin P. ORCID: https://orcid.org/0000-0001-8854-2629 and Mazouz, Khelifa ORCID: https://orcid.org/0000-0001-6711-1715 2020. The R&D anomaly: risk or mispricing? Journal of Banking and Finance 115 , 105815. 10.1016/j.jbankfin.2020.105815

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Abstract

We offer new evidence on the risk versus mispricing explanations for the R&D anomaly. Return covariance with a characteristic-based factor captures the cross-sectional return variation on R&D portfolios not explained by asset pricing models. This is consistent with both covariance risk and mispricing. Under the framework of the ICAPM, we find little economic justification that an R&D factor is a proxy for innovations to a state variable. The characteristic subsumes the factor loading in direct tests, providing support to the mispricing hypothesis. Investigating the mispricing explanation further, we reject the assertion that the R&D anomaly arises from the correction of stocks mispriced by investor sentiment. A natural experiment exploiting the pilot program under Regulation SHO shows no evidence that the anomaly persists due to limits to arbitrage in the form of short sale constraints.

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Schools > Business (Including Economics)
Subjects:	H Social Sciences > HG Finance
Publisher:	Elsevier
ISSN:	0378-4266
Date of First Compliant Deposit:	24 March 2020
Date of Acceptance:	14 March 2020
Last Modified:	08 Jul 2025 10:15
URI:	https://orca.cardiff.ac.uk/id/eprint/130557

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