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| Author: | Al-Horani, A. Pope, P.F. Stark, A.W. |
| Title: | Research and development activity and expected returns in the United Kingdom |
| Journal: | European Finance Review
2003 : VOL. 7:1, p. 27-46 |
| Index terms: | R&D Stock returns United Kingdom USA |
| Language: | eng |
| Abstract: | Fama and French (1992) show that size and book-to-price dominate CAPM beta and other variables such as the price earnings ratio and dividend yield in explaining the cross-section of US stock returns. Comparable evidence for the UK points to a book-to-price effect, but not a size effect (Chan and Chui, 1996; Strong and Xu, 1997). The aim of this study is to show that a measure of research and development (RD) helps explain cross-sectional variation in UK stock returns. Fama and French (1993, 1995, 1996) also show that a three-factor model captures a high proportion os the time series variation in portfolio returns, again for the US. This study shows, for the UK, that a modification to the three-factor model to take account of RD activity can significantly enhance the explanatory power of the three-factor model. |
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