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How Do Investors React to R&D Reductions

How Do Investors React to R&D Reductions. Authors: Konan Chan, Yueh-Hsaing Lin, and Yanzi Wang Discussant: Chung-Ying Yeh , Department of Finance, NCHU. Strong Points of this Paper . outstanding introduction, very good motivation clear exposition, clear language near-to-perfect results

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How Do Investors React to R&D Reductions

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  1. How Do Investors React to R&D Reductions Authors: Konan Chan, Yueh-Hsaing Lin, and Yanzi Wang Discussant: Chung-Ying Yeh, Department of Finance, NCHU

  2. Strong Points of this Paper • outstanding introduction, very good motivation • clear exposition, clear language • near-to-perfect results • address main potential concerns in robustness tests • make the story quite convincing even for me

  3. Comment 1: Is overinvestment sufficient to explain the positive long-run abnormal returns? • I can agree that reducing R&D can the cost of capital (the discount rate) for the overinvested firms. This can bring up stock prices and generate positive returns. • But does this story sufficiently explain the 5-year long positive abnormal returns? (I think NO!)

  4. Comment 1: Is overinvestment sufficient to explain the positive long-run abnormal returns? • You need another mechanism: investors UNDERREACT the decreased cost of capital due to R&D reductions. • You subtly or strategically mention it but you don’t test it. I think that it is a critical point for you results. • Underreaction or Slow information transition (Hong and Stein (1999)) are two possible ways to explain the prolonged abnormal returns. You need to address this.

  5. Comment 2: The Definition of Event Days

  6. How to deal with firms with CONSECUTIVE R&D reductions? • Another extreme scenario: R&D expenses has a seasonal feature, frequent ups and downs. • This issue can not be ignorable because your R&D reductions need to make sense, in particular finance sense. • Independence assumption, or using beginning/ending dates

  7. Comment 3: how to isolate industrial effect

  8. How to proper isolate industrial effect is very important. Your sample is not spread evenly. • Managerial Myopic Hypothesis is useless. Positive long-run abnormal returns totally rule out this hypothesis. My suggestion: can you find any behavioral stories (maybe stories about momentum) to explain your findings.

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