R&D Premium: The Intangible Side of Value

Abstract

This article investigates the relationship between R&D investment and excess returns. R&D-intensive portfolios generate higher returns than less R&D-oriented portfolios. This is despite these portfolios having lower valuation ratios. We establish that the R&D premium is a robust phenomenon with its own cyclical regularity. In particular, excess returns of R&D-intensive portfolios concentrate around the “tech bubble” period. Further, we explore the complementary relationship between intangible and tangible assets of firms, as well as the interaction between the R&D premium and value premium. We simulate a set of investing strategies integrating R&D with value; all of them perform well with improved and more stable returns than portfolios without an R&D factor.