Details of Research Outputs

Investors demand higher premiums from firms whose future R&D performance is difficult to evaluate. We construct a measure of R&D information quality (RDIQ) by linking a firm's historical innovation input (R&D expenditures) and innovation outcome (sales) and find significant evidence that expected excess returns decrease with RDIQ. We find that the high-minus-low RDIQ hedge portfolio earns excess returns of −23 (−25) bps per month in value-weighted (equal-weighted) returns. We also find that the RDIQ effect is weakly correlated with commonly used risk factors, is stronger for firms with greater uncertain business environment, and exhibits incremental pricing power.