Year: 2025
Type: article
Abstract: R&D expenditure has long been regarded as an essential driver of firm innovation and long-term growth. However, its impact on extreme stock price declines remains underexplored. This paper investigates whether and how corporate R&D intensity affects the likelihood of stock price crashes among U.S.-listed companies from 2013 to 2023. Building on signaling theory, growth option theory, and agency theory, this study posits that R&D activities may alter a firm’s short-term profitability and shape investor expectations, thereby influencing crash risk. Drawing on a panel dataset from CRSP and Compustat, one employs Probit and OLS regressions to examine both direct and indirect pathways through which R&D investment impacts crash probability. The findings suggest that R&D can, under certain circumstances, mitigate crash risk over a lagged period, whereas firms with higher current profitability are paradoxically more susceptible to crashes. This study contributes to the literature by illustrating the “time-lag effect” of R&D on crash risk and highlights firm size as an important contingency factor. Overall, the results have meaningful implications for corporate managers and investors. Firms seeking to minimize crash risk should carefully plan R&D allocations and manage investor expectations, while stakeholders need to be aware of the potential overvaluation bubbles that may accompany high-profit firms.
Author: Minghao Liu
Institution: University of Illinois Urbana-Champaign
Language: English
Subfield: Accounting
Domain: Social Sciences
Open Access status: hybrid
OpenAlex ID: W4409210613