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Research and development’s role in stock prices

Stock market participants have started to pay more and more attention to companies’ investment in research and development (R&D) programs. Given this increased importance of R&D to investors, Jason Jiang and David Larsen, BBA ’17, sought to explore the relationship between it and stock price volatility, or the rate of price fluctuation. 

They found a negative relationship between R&D investment intensity and jump volatility, or dramatic changes in price. This is because R&D-intensive companies prefer higher stock liquidity, or the ease at which a stock can be bought and sold without significantly impacting the price. Stock liquidity reduces the cost of financing and helps attract investors. So, when companies actively release R&D information to maintain liquidity, it provides context as well as positive signals to potential investors, leading to lower stock price fluctuation.