Advertising, research and development, and capital market risk: higher risk firms versus lower risk firms

• Published in: Journal of business economics and management Vol. 13; no. 4; pp. 724 - 744
• Main Authors: Chen, Miao-Ling, Peng, Chi-Lu, Wei, An-Pin
• Format: Journal Article
• Language: English
• Published: Vilnius Gediminas Technical University 01.09.2012; Taylor & Francis Group
• Subjects: Advertising; Analysis; Capital market; CAPM; Economy; idiosyncratic risk; Industrial research; Influence; marketing; quantile regression; R&D; Taiwan; β-risk; Taiwan; M37; marketing; idiosyncratic risk; RD; C21; CAPM; G32; quantile regression; βrisk; advertising
• ISSN: 1611-1699; 2029-4433
• DOI: 10.3846/16111699.2012.666998

This study examines how a firm's advertising and RD affects the firm's β-risk and idiosyncratic risk, which are metrics of interest to both finance executives and senior management. Due to the existence of a non-normal and heteroscedasticity dataset, we use quantile regression to analyze the sample to understand the full behavior of our non-normally distributed datapoints. The evidence of this study shows that: (1) Advertising is significantly associated with lower β-risk for firms with lower, median and higher β-risk. (2) RD significantly increases β-risk for firms with median and higher β-risk firms. (3) Advertising is significantly associated with lower idiosyncratic risk for firms with higher idiosyncratic risk. (4) RD is significantly associated with higher idiosyncratic risk for firms with median and higher idiosyncratic risk. In summary, our evidence shows that both advertising and RD have a stronger effect on firms with higher β- and idiosyncratic risk than on those with lower β- and idiosyncratic risk, respectively. Our findings are useful to help both management executives and investors. Firm managers can allocate limited resources more efficiently to reduce their firm risk; investors could exert their influence on firm's senior executives to make decisions that are beneficial to stock returns.