The Impact of R&D Expenditures on IPOs Underpricing - A Double Edged Sword Perspective
Author
Abstract
Finance scholars typically investigate the relationship between research and development (R&D) expenditures and underpricing of initial public offerings (IPOs) from the angle of information asymmetry. However, R&D activities are also the source of potential value creation activities (Teece, 1998; DeCarolis and Deeds, 1999) suggesting that R&D expenditure is the signal of the long-term growth, performance and quality of a firm. This paper examines the nonmonotonic relationship between R&D expenditure and IPO underpricing. We further investigate if high-tech industry and life cycle moderate the relationship between R&D expenditure and underpricing. We find a significant non-monotonic relationship between R&D expenditure and underpricing indicating a double-edged sword effect. If R&D intensity is moderate, it is a quality signal tool to lower the extent of underpricing. However, with R&D expenditure higher than a certain level, the information asymmetry increases and raises underpricing. Finally, high-tech industry and life cycle both moderate the non-monotonic relationship between R&D expenditure and underpricing. R&D expenditure help high-tech firms signal their value to improve investors' valuation on R&D activities to ease IPO underpricing. Investors also value the growing or younger firms higher when they put more efforts on R&D.
Key Words
Double-Edged Sword, Initial Public Offerings, Research and Development Expenditures, Underpricing
