EVALUATING R&D PREMIUM IN THE INDIAN HEALTH AND PHARMACEUTICALS INDUSTRIES

Authors

  • Bhumiswor Sharma CHRIST (Deemed to be University), Bangalore
  • Srikanth Pyati CHRIST (Deemed to be University), Bangalore

DOI:

https://doi.org/10.9744/jmk.24.2.118-128

Keywords:

R&D premium, asset pricing, cross-sectional models, portfolio management, healthcare industry

Abstract

The economic advantages of research and development (R&D) investment have shown conflicting results in empirical studies. This study aimed to examine a different approach, evaluating R&D premium and cross-sectional variability of equity returns, a particular case for the Indian healthcare industry. The primary motivation for this study arrived from the size of the healthcare industry, the world's third-largest and India's largest industry, and the investment made in R&D activities. Results demonstrated that India's annualized R&D premium was significantly greater than the current value, investment, profitability, and momentum premiums. It indicated that the new R&D risk factor in pricing models is a primary reference for Indian equity investors, particularly for companies with R&D spending. Results were robust in evaluating portfolio return using univariate and multivariate tests. Findings suggested that R&D augmented models outperformed conventional pricing models, denoting that the R&D factor undoubtedly revealed priced element and vital risk factor in designing pricing models for emerging countries like India. When adjusting to R&D investment and trading strategies, policymakers, and financial professionals should hereby evaluate their risk-return implications

Author Biography

Srikanth Pyati, CHRIST (Deemed to be University), Bangalore

Dr Srikanth P (srikanth.p@christuniversity.in) is an Associate professor of finance at the School of Business and Management, CHRIST (Deemed to be University) Bangalore. He has teaching experience of more than 17 years in the area of corporate finance and investment. He has contributed several research articles in national and international level journals and conferences. His areas of interest include corporate finance, behavioral finance, capital market and asset pricing.

References

Ang, J., & Cheng, Y. (2011). The endogeneity of information asymmetry and corporate financing decisions. Journal of Financial Research, 34(3), 411–440.

BaŞgoze, P., & Sayin, H. C. (2013). The effect of R&D expenditure (investments) on firm value: Case of Istanbul stock exchange. Journal of Business, Economic & Finance, 2(3), 5–12.

Black, F., Jensen, M. C., & Scholes, M. (1972). The capital asset pricing model: Some empirical tests. Studies in the Theory of Capital Markets, 81(3), 79–121.

Callimaci, A., & Landry, S. (2004). Market valuation of research and development spending under Canadian GAAP. Canadian Accounting Perspectives, 3(1), 33–54.

Carhart, M. M. (1997). On persistence in mutual fund performance. Journal of Finance, 52 (1), 57–82.

Chambers, D., Jennings, R., & Thompson, R. B. (2002). Excess returns to R&D-intensive firms. Review of Accounting Studies, 7(2–3), 133–158.

Chan, L. K. C., Lakonishok, J., & Sougiannis, T. (2001). The stock market valuation of research and development expenditures. Journal of Finance, 56(6), 2431–2456.

Chen, S. S., Chen, Y. S., Liang, W. L., & Wang, Y. (2020). Public R&D spending and cross-sectional stock returns. Research Policy, 49 (1), 103887. https://doi.org/10.1016/j.respol.2019.103887

Cohen, L., Diether, K., & Malloy, C. (2013). Mis-valuing innovation. The Review of Financial Studies, 26(3), 635–666.

Cremers, K. J. M., Nair, V. B., & John, K. (2009). Takeovers and the cross-section of returns. Review of Financial Studies, 22(4), 1409–1445.

Donelson, D. C., & Resutek, R. J. (2012). The effect of R&D on future returns and earnings forecasts. Review of Accounting Studies, 17 (4), 848–876.

Dongmei, L. (2011). Financial constraints, R&D investment, and stock returns. The Review of Financial Studies, 24(9), 2974–3007.

Ehie, I. C., & Olibe, K. (2010). The effect of R&D investment on firm value: An examination of US manufacturing and service industries. International Journal of Production Economics, 128(1), 127–135.

Fama, E. F., & French, K. R. (1992). The crosssection of expected stock returns. The Journal of Finance, 47(2), 427–465.

Fama, E. F., & French, K. R. (1993a). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1), 3–56.

Fama, E. F., & French, K. R. (1993b). Fama-French APT threefactor model. Journal of Financial Economics, 33, 53–56.

Fama, E. F., & French, K. R. (1996). Multifactor explanations of asset pricing anomalies. Journal of Finance, 51(1), 55–84.

Fama, E. F., & French, K. R. (2006). The value premium and the CAPM. Journal of Finance, 61(5), 2163–2185.

Fama, E. F., & French, K. R. (2015). A five-factor asset pricing model. Journal of Financial Economics, 45(4), 1–22.

Fama, E. F., & French, K. R. (2018). Choosing fac¬tors. Journal of Financial Economics, 128(2), 234–252.

Fama, E. F., & French, K. R. (2020). The value premium. The Review of Asset Pricing Studies, 11(1), 105–121.

Fama, E. F., & MacBeth, J. (1973). Risk, return, and equilibrium: Empirical tests. The Journal of Political Economy, 81(3), 607–636.

Ghaffar, A., & Khan, W. A. (2014). Impact of re-search and development on firm performance. Inter¬national Journal of Accounting and Financial Reporting, 4(1), 357–367.

Gibbons, M. R., Ross, S. A., & Shanken, J. (1989). A test of the efficiency of a given portfolio. Econometrica, 57(5), 1121–1152.

Gu, L. (2016). Product market competition, R&D investment, and stock returns. Journal of Finan-cial Economics, 119(2), 441–455.

Hsu, F. J., Chen, M. Y., Chen, Y. C., & Wang, W. C. (2013). An empirical study on the rela¬tion¬ship between R&D and financial performance. Journal of Applied Finance & Banking, 3(5), 107–119.

Hsu, S. T., & Cohen, S. K. (2020). Revisiting the R&D investment–performance relationship: The moderating effects of factor market characteristics. Journal of Engineering and Technology Management, 57(1), 101570.

Kim, Y. S., & Park, K. J. (2020). R&D spending and stock returns: Evidence from South Korea. Asian Economic and Financial Review, 10(7), 744–757. https://doi.org/10.18488/journal.aefr.2020.107.744.757

Lev, B., Sarath, B., & Sougiannis, T. (2005). R&D reporting biases and their consequences. Contem-porary Accounting Research, 22(4), 977–1026.

Lev, B., & Sougiannis, T. (1996). The capitalization, amortization, and value-relevance of R&D. Journal of Accounting and Economics, 21(1), 107–138.

Li, D. (2011). Financial constraints, R&D investment, and stock returns. Review of Financial Studies, 24(9), 2974–3007.

Lin, J. C., & Wang, Y. (2016). The R&D premium and takeover risk. Accounting Review, 91 (3), 955–971.

Lu, S. (2020). The explanatory power of R&D for the stock returns in the Chinese equity market. Pacific Basin Finance Journal, 62(Ju¬ne), 101380.

Mahlich, J., & Yurtoglu, B. B. (2019). Returns on different types of investment in the global pharmaceutical industry. Managerial and Decision Economics, 40(1), 16–36.

Majumdar, S. K. (2011). Scalability versus flexibility: Firm size and R&D in Indian industry. Journal of Technology Transfer, 36(1), 101–116.

Mittal, S., & Sharma, D. (2021). The impact of COVID-19 on stock returns of the Indian healthcare and pharmaceutical sector. Australasian Accounting, Business and Finance Journal, 15(1), 5–21.

Moncada-Paternò-Castello, P., Ciupagea, C., Smith, K., Tübke, A., & Tubbs, M. (2010). Does Europe perform too little corporate R&D? A comparison of EU and non-EU corporate R&D performance. Research Policy, 39(4), 523–536.

Nandy, M. (2020). Is there any impact of R&D on financial performance? Evidence from Indian pharmaceutical companies. FIIB Business Review, 9(4), 319–334.

Oh, J. M. (2017). Absorptive capacity, technology spillovers, and the cross-section of stock returns. Journal of Banking and Finance, 85, 146–164.

Opoku-Mensah, E., Yin, Y., & Addai, B. (2021). Do mature firms gain higher economic value from R&D investment? Journal of Industry, Com-petition and Trade, 21(2), 211–223.

Pal, B., & Nandy, M. (2019). Innovation and business sustainability (IBS): Empirical evidence from Indian pharmaceutical industry (IPI). Artificial Intelligence for Engineering Design, Analysis and Manufacturing: AIEDAM, 33(2), 117–128.

Rao, A. (2020). Strategic research and development investment decisions in the pharmaceutical industry. Marketing Science, 39(3), 564–586.

Romasanta, A. K. S., van der Sijde, P., & van Muijlwijk-Koezen, J. (2020). Innovation in pharma-ceu¬tical R&D: Mapping the research landscape. Scientometric, 125(3), 1801–1832.

Sharma, C. (2012). R&D and firm performance: Evidence from the Indian pharmaceutical industry. Journal of the Asia Pacific Economy, 17(2), 332–342.

Sharma, B., & Pyati, S. (2021). Research & development premium in the Indian equity market: An empirical study. Asian Economic and Financial Review, 11(10), 816–828.

Silva, R. da B., Klotzle, M. C., Pinto, A. C. F., & da Motta, L. F. J. (2018). R&D investment and risk in Brazil. Global Finance Journal, 35(2), 106–114.

Sinha, A. K., Mishra, A. K., & Patel, Y. (2019). Firm size, R&D expenditure, and international orien-tation: An empirical analysis of performance of Indian firms. International Journal of Technological Learning, Innovation and Development, 11(4), 311–336.

Su, C. Y., Guo, Y. N., Chai, K. C., & Kong, W. W. (2021). R&D investments, debt capital, and ownership concentration: A three-way interaction and lag effects on firm performance in China’s pharmaceutical industry. Frontiers in Public Health, 9(October), 14–31.

Vanderpal, G. (2015). Impact of R&D expenses and corporate financial performance. Journal of Accounting and Finance, 15(7), 135–149.

Wang, C. H. (2011). Clarifying the effects of R&D on performance: Evidence from the high technology industries. Asia Pacific Management Review, 16(1), 51–64.

Warusawitharana, M. (2015). Research and development, profits, and firm value: A structural estima-tion. Quantitative Economics, 6(2), 531–565.

Xu, K., Geng, C., Wei, X., & Jiang, H. (2020). Fi-nancing development, financing constraint and R&D investment of strategic emerging industries in China. Journal of Business Economics and Management, 21(4), 1010–1034.

Yu, L., Liu, X., Fung, H. G., & Leung, W. K. (2020). Size and value effects in hightech industries: The role of R&D investment. North American Journal of Economics and Finance, 51(October), 1–12.

Yury, D., Albert, L., & Ilia, K. (2017). R & D ef¬fects, risks and strategic decisions: Evidence from listed firms in R & D- intensive countries. Foresight - The Journal of Future Studies, Strategic Thinking and Policy, 19(3), 615–627.

Downloads

Published

2022-10-03