Corporate R&D spending, subsidies and stock market reactions to seasoned equity offering announcements: evidence from China

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3 Citations (Scopus)

Abstract

Purpose: This study focuses on an emerging market, China, and investigates the effects of corporate research and development (R&D) spending and subsidies on stock market reactions to seasoned equity offering (SEO) announcements. Design/methodology/approach: The study uses a sample of SEOs announced over the period of 2003–2018 in the Chinese A-share market. The cumulative abnormal stock returns (CARs) are adopted to measure the stock market response to SEOs. The R&D spending-to-sales ratio (R&D subsidies) in 2 years before SEO announcements is used to measure the pre-SEO R&D spending (R&D subsidies). The instrumental variable (IV) regression method is applied to address the endogeneity problem in the robustness test. Findings: This study demonstrates that firms with high R&D spending suffer stock overpricing and experience a negative market reaction when they announce SEOs, but R&D subsidies alleviate stock overpricing and mitigate the negative relationship between R&D spending and SEO market reactions. Originality/value: Although the prior studies have demonstrated that information asymmetry, which causes stock overpricing, explains negative stock market reactions to SEOs, it is unclear if a certain factor that causes information asymmetry affects SEO market reactions. This study fills this gap and focuses on R&D spending, demonstrating that R&D spending is negatively related to SEO performance.

Original languageEnglish
Pages (from-to)5380-5407
Number of pages28
JournalInternational Journal of Emerging Markets
Volume18
Issue number11
DOIs
Publication statusPublished - 5 Dec 2023
Externally publishedYes

Keywords

  • R&D spending
  • SEOs
  • Stock market reactions
  • Stock overpricing

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