Is R & D risky?

Philip Bromiley · Devaki Rau · Yu Zhang

153 citations0/0 files storedStrategic Management Journal

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Firm Innovation and Growth Innovation and Knowledge Management Capital Investment and Risk Analysis

Abstract

Research summary : Many studies use research and development ( R & D) intensity or R & D spending as a proxy for risk taking, but we have little evidence that either associates positively with firm risk. We analyze the relations between R & D intensity ( R & D spending to sales) and R & D spending on the one hand and 11 different indicators of firm risk on the other, using data from 1,907 to 3,908 firms in various industries over 13 years. The analysis finds a general lack of consistent positive association between R & D and firm risk, making the use of R & D as an indicator of risk taking questionable. Furthermore, R & D intensity and spending do not correlate positively, suggesting they measure different constructs. We discuss potential reasons for these nonsignificant results. Our study demonstrates that researchers should avoid casual use of R & D as a proxy for risk taking without explicitly providing a clear definition and measurement model for risk . Managerial summary : Risk is a key construct in strategic management research. Many studies in this area measure risk taking by research and development ( R & D) intensity (the ratio of R & D spending to sales) or R & D spending. However, since R & D intensity and spending have also been used to measure various other things such as information processing demands, this raises the question of whether R & D intensity and spending are valid indicators of firm risk. We examine this issue by considering the associations of R & D intensity and R & D spending with conventional measures of firm risk. We find a general lack of consistent positive association between R & D and firm risk, making the use of R & D as an indicator of risk taking questionable. Furthermore, R & D intensity and spending do not correlate positively, suggesting they measure different things . Copyright © 2016 John Wiley & Sons, Ltd.

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References

1964CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*2014A five-factor asset pricing model 1965The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets 1989Innovation and Learning: The Two Faces of R & D 1975THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS**This paper is another in a series of interrelated theoretical and statistical studies of corporate financial and investment policies being made under grants from the Rockefeller Foundation, and more recently the Ford Foundation, to the Harvard Business School. The generous support for this work is most gratefully acknowledged. The author is also much indebted to his colleagues Professors Bishop, Christenson, Kahr, Raiffa, and (especially) Schlaifer, for extensive discussion and commentary on an earlier draft of this paper; but responsibility for any errors or imperfections remains strictly his own.[Professor Sharpe's paper, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk” (Journal of Finance, September 1964) appeared after this paper was in final form and on its way to the printers. My first section, which parallels the first half of his paper (with corresponding conclusions), sets the algebraic framework for sections II, III and VI, (which have no counterpart in his paper) and for section IV on the equilibrium prices of risk assets, concerning which our results differ significantly for reasons which will be explored elsewhere. Sharpe does not take up the capital budgeting problem developed in section V below.]1992The resource‐based view within the conversation of strategic management 1987Managerial Perspectives on Risk and Risk Taking 1998

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