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The R&D anomaly: risk or mispricing?

Leung, Woon, Evans, Kevin P. and Mazouz, Khelifa 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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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: 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: 06 Oct 2021 18:49

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