The R&D Anomaly in January Yuan Li University of Cambridge

Chan, Lakonishok and Sougiannis (2001 JF): Companies with high R&D to equity market value ratio earn large excess returns ---- the R&D anomaly (1) Companies with high physical investment (such as capital expenditure; change in inventory; change in operating assets; change in total assets) earn low future returns. (2) It defies the most recently developed factor models, such as Q and FF5 factors.

Debate Mispricing: Chan et al. (2001 JF); Cohen, Diether and Malloy (2013 RFS); etc. Risk: Berk, Green and Naik (2004 RFS); Chambers, Jennings, and Thompson II (2011 RAS); Li (2011, RFS); Lin and Wang (2016, TAR); Gu (2016, JFE); etc.

Summary of Findings (1) Most or all of the R&D premium resides in January. (2) The January R&D premium is robust to all existing factors and to all scale variables. (3) The January R&D premium lasts up to 20 annual lags. (4) About 70% (100%) of the January R&D premium is earned during the first five (ten) trading days of January. (5) Ad, organizational capital, and physical investment do not exhibit the January phenomenon. (6) Tax loss-selling? (a) No negative return in December; (b) The January R&D premium is stronger among past losers and firms with higher institutional ownership; (c) No clear pattern between low tax years and high tax years. Puzzle???

Fiscal year ending in calendar year y-1 End of JUN End of JUN LOWSRD (<=30%) MIDSRD (30% - 70%) HIGHSRD (>=70%) Fiscal year ending in calendar year y-1 End of JUN End of JUN Holding Period Y - 1 Y Y + 1 DEC DEC DEC Sample period: July 1976 to Dec 2016

Table 1 Raw Returns to RD-to-Market Equity Groups Panel A: VW&ALL MISSRD (52.54%) ZERORD (8.63%) LOWSRD (8.62%) MIDSRD (12.24%) HIGHSRD (17.87%) HIGHSRD-LOWSRD ALL MONTHS 0.61 0.86 0.51 0.67 0.88 0.37 (3.06) (3.52) (2.45) (3.15) (3.47) (2.34) NO JAN 0.65 0.91 0.56 0.66 0.80 0.24 (3.13) (3.58) (2.60) (2.97) (3.00) (1.45) JAN 0.19 0.28 -0.03 0.82 1.84 1.86 (0.26) (0.33) (-0.03) (1.07) (2.08) (3.34) JAN - NO JAN -0.46 -0.63 -0.58 0.16 1.04 1.62 (-0.61) (-0.70) (-0.69) (0.21) (1.13) (2.79) Panel B: EW&ABM (all but micro) 0.77 0.89 0.52 0.84 1.12 0.60 (3.26) (1.92) (3.04) (3.45) (4.43) 0.79 0.93 0.50 0.96 0.46 (3.44) (3.23) (1.79) (2.78) (2.84) (3.39) 0.62 0.49 0.73 1.30 2.91 2.18 (0.79) (0.55) (0.71) (1.27) (2.53) (3.62) -0.17 -0.43 1.95 1.71 (-0.21) (-0.46) (0.22) (0.48) (1.63)

Table 2: Factor-adjusted Returns Panel A: VW&ALL CAPM FF3 FF3+UMD FF5 Q SY ALL MONTHS 0.25 0.12 0.18 0.15 0.24 -0.03 (1.62) (0.85) (1.17) (1.03) (1.49) (-0.19) NO JAN 0.11 0.01 0.08 0.03 0.14 -0.21 (0.67) (0.04) (0.53) (0.16) (0.82) (-1.16) JAN 1.84 1.33 1.45 1.52 1.80 1.64 (3.20) (3.01) (3.34) (3.29) (3.05) (3.84) JAN - NO JAN 1.73 1.37 1.48 1.66 1.85 (2.91) (2.85) (2.95) (2.94) (2.71) (3.98) Panel B: EW&ABM 0.49 0.41 0.45 0.51 0.21 (3.72) (3.39) (2.99) (3.66) (3.38) (1.39) 0.34 0.29 0.31 0.02 (2.62) (2.46) (2.31) (2.60) (2.83) (0.13) 2.14 1.81 2.00 1.96 1.86 2.24 (3.5) (3.36) (3.91) (3.71) (2.55) (4.84) 1.69 2.23 (2.88) (2.76) (2.98) (1.95) (4.58)

Table 3: Different scale variables Panel A: VW&ALL (FF3) SALE LAGBV LAGAT LAGPPE LAGEMP CAPX FENDMV JUNEMV ALL MONTHS -0.03 0.07 0.06 0.1 0.17 0.13 0.01 (-0.19) (0.46) (0.42) (0.70) (1.47) (1.26) (0.89) (0.04) NO JAN -0.16 -0.05 -0.07 -0.02 0.05 -0.13 (-0.97) (-0.33) (-0.49) (-0.14) (0.84) (0.37) (0.06) (-0.90) JAN 1.39 1.47 1.44 1.01 1.55 1.28 1.36 (2.11) (2.27) (2.35) (2.41) (2.14) (2.92) (2.76) (3.26) JAN - NO JAN 1.45 1.54 1.46 0.91 1.49 1.27 (2.28) (2.40) (2.37) (1.86) (2.72) (2.61) (3.38) Panel B: EW&ABM (FF3) 0.12 0.10 0.11 0.15 0.28 0.4 0.41 (0.68) (0.66) (0.36) (1.93) (3.46) (3.39) 0.00 0.04 0.16 0.29 (-0.10) (-0.34) (0.01) (-0.37) (0.24) (1.1) (2.46) 1.42 1.48 1.09 1.22 1.19 1.78 1.81 (2.24) (2.62) (1.68) (1.91) (2.42) (3.60) (3.36) 1.52 1.29 1.14 1.50 (2.19) (1.62) (1.89) (1.77) (2.09) (2.96)

Table 4 Sub-sample Periods Panel A: VW&ALL(FF3) 1977-1986 1987-1996 1997-2006 2007-2016 ALL -0.02 -0.08 0.07 0.27 (-0.06) (-0.34) (0.21) (1.23) NO JAN -0.05 -0.27 -0.06 0.15 (-0.14) (-1.15) (-0.17) (0.69) JAN 1.88 3.18 2.24 1.90 (1.03) (8.59) (1.68) (3.71) JAN - NO JAN 1.93 3.46 2.30 1.75 (7.87) (1.67) (3.14) Panel B: EW&ABM (FF3) 0.25 0.31 0.62 0.38 (1.26) (1.55) (1.9) (1.81) 0.23 0.11 0.51 0.29 (1.19) (0.57) (1.61) (1.38) 1.89 3.80 2.81 1.34 (1.53) (9.23) (1.56) (2.43) 1.66 3.69 2.31 1.05 (1.32) (8.20) (1.78)

Figure 1 The R&D premium by calendar year

Figure 2 The January R&D Premium during the 20 years after portfolio formation VW&ALL(FF3) EW&ABM(FF3)

Table 5 The R&D premium during different trading days of January Ret-rf CAPM FF3 FF3+UMD FF5 Q SY ALL 0.09 0.07 0.08 0.06 (3.38) (3.37) (2.77) (3.2) (2.52) (2.41) (3.31) 1 to 5 0.25 0.17 0.24 0.21 0.15 0.32 (3.99) (3.98) (2.10) (4.61) (3.19) (2.78) (6.06) 6 to 10 0.12 0.11 0.10 (2.57) (2.62) (2.36) (2.02) (1.87) (2.25) 11 to 15 -0.01 0.00 -0.02 -0.03 -0.05 (-0.10) (0.01) (-0.45) (-0.4) (-0.34) (-0.55) (-0.97) more than 16 0.01 0.02 (0.16) (0.21) (-0.02) (0.50) (0.07) (-0.03)

Table 6 Fama-MacBeth Regression ALL NO JAN JAN logsrd 0.35 0.24 1.58 0.21 0.15 0.83 (6.82) (4.91) (6.94) (5.99) (4.49) (5.31) logmv -0.1 -0.08 -0.35 (-2.64) (-1.96) (-2.77) logbm 0.12 0.09 0.46 (2.28) (1.66) (2.22) beta 0.03 0.13 (0.35) (0.26) pre1mret -5.33 -4.69 -12.43 (-12.92) (-11.23) (-8.68) pre1yret 0.40 -1.91 (1.34) (2.51) (-3.04) pre3yret 0.02 0.08 -0.69 (0.49) (2.12) (-4.11) presmret 0.37 0.20 2.29 (1.35) (0.69) (3.18)

Table 6 Continued ALL NO JAN JAN divyield 0.43 0.41 0.68 (0.16) (0.15) (0.06) idvol -1.45 -3.93 26.27 (-0.98) (-2.72) (4.03) aq -2.36 -2.4 -1.98 (-2.14) (-2.1) (-0.49) exploss -0.23 -0.62 4.16 (-0.81) (-3.13) (1.69) preprc 0.00 0.01 (0.22) (-0.17) (0.88) illiquid -0.02 (-0.09) (0.00) (-0.31)

Panel A: Separated by Financial Constraints (KZ) Table 7 The R&D premium across firms with different characteristics Li (2011 RFS): A financial constrained R&D-intensive firm is more likely to suspend/discontinue their projects, and hence is riskier. Panel A: Separated by Financial Constraints (KZ) ALL&VW (FF3) ABM&EW (FF3) LOW MID HIGH HIGH-LOW ALL -0.12 0.14 0.49 0.61 0.38 0.29 0.51 0.13 (-0.77) (0.72) (2.18) (2.42) (2.32) (2.13) (3.26) (0.75) NOJAN -0.26 0.04 0.24 0.50 0.12 0.35 0.06 (-1.58) (0.19) (1.05) (1.93) (1.8) (0.85) (0.33) JAN 1.21 1.31 3.04 1.83 1.52 2.08 2.3 0.78 (1.91) (2.15) (4.6) (2.1) (2.02) (4.66) (3.59) (1.3)

Panel B: Separated by Competition (HHI) Table 7 Continued Gu (2006): “Competition increases the probability that potential future cash flows will be extinguished and in turn decreases the benefits of R&D investing and raises the chances that the project will be suspended if adverse shocks to future cash flows occur. “ Panel B: Separated by Competition (HHI) VW&ALL(FF3) EW&ABM(FF3) LOW MID HIGH HIGH-LOW ALL 0.39 0.02 -0.37 0.64 0.32 0.25 -0.39 (1.98) (0.14) (0.11) (-1.65) (4.12) (2.15) (2.12) (-2.32) NOJAN 0.27 -0.14 0.00 -0.27 0.46 0.15 0.2 -0.26 (1.33) (-0.84) (0.02) (-1.17) (2.98) (1.06) (1.71) (-1.48) JAN 1.77 1.67 0.03 -1.74 2.5 2.21 0.89 -1.61 (3.36) (2.81) (0.06) (-2.36) (4.27) (3.2) (1.93) (-2.71)

Panel C: Separated by innovate ability Table 7 Continued Cohen, Diether and Malloy (2013 RFS): Past track record of translating R&D into sales contains information about the ability of the firm to innovate, and investor ignore such information. Panel C: Separated by innovate ability VW&ALL(FF3) EW&ABM(FFE) LOW MID HIGH HIGH-LOW ALL 0.05 0.06 0.42 0.37 0.32 0.26 0.56 0.24 (0.25) (0.32) (2) (1.39) (1.94) (1.8) (3.48) (1.46) NOJAN -0.06 -0.04 0.28 0.34 0.07 0.11 0.41 (-0.28) (-0.19) (1.3) (1.31) (0.41) (0.73) (2.44) (1.93) JAN 1.02 1.16 1.82 0.8 2.64 1.87 2.03 -0.61 (1.32) (1.59) (2.56) (0.7) (4.97) (3.63) (3.53) (-1.25)

Table 8 The R&D Premium by Calendar Month VW&ALL (FF3) EW&ABM (FF3) Month est t JAN 1.33 (3.01) 1.81 (3.36) FEB -0.18 (-0.29) 0.13 (0.4) MAR -0.44 (-0.77) -0.32 (-0.84) APR 0.7 (1.14) -0.03 (-0.06) MAY 0.25 (0.91) 0.46 (1.74) JUN -0.41 (-1.14) -0.59 (-1.96) JUL 0.79 (1.55) 0.89 (2.76) AUG -0.37 (-1.21) 0.26 (0.96) SEP -0.64 (-1.61) 0.39 (1.15) OCT -0.04 (-0.07) -0.07 (-0.14) NOV 0.43 0.62 (1.26) DEC 0.04 (0.06) (-0.09)

Table 9 The R&D premium among firms with different tax-loss selling incentives and institutional ownership Panel A: Separated by firm size ALL&VW(FF3) ABM&EW(FF3) MICRO SMALL LARGE ALL 0.89 0.48 0.08 1.07 0.51 0.37 (5.85) (3.12) (0.54) (7.57) (3.41) (2.93) NOJAN 0.73 0.35 -0.05 0.91 0.44 0.21 (4.34) (2.09) (-0.31) (6.41) (2.88) (1.62) JAN 2.66 2.35 1.19 3.24 1.79 2.06 (4.97) (3.67) (2.54) (5.39) (2.49) (4.08) DEC 0.46 0.01 0.05 2.34 0.07 -0.07 (1.14) (0.02) (0.08) (3.78) (0.14) (-0.15)

Panel B: Separated by past one year return Table 9 Continued Panel B: Separated by past one year return VW&ALL(FF3) EW&ABM(FF3) LOW MID HIGH ALL 0.43 0.12 0.21 0.55 0.37 0.25 (2.15) (0.71) (1.19) (3.25) (1.68) NOJAN 0.26 -0.09 0.11 0.18 0.14 (1.25) (-0.54) (0.56) (2.52) (1.56) (0.87) JAN 2.45 1.46 1.06 2.53 1.85 1.38 (3.08) (3.06) (1.67) (3.46) (4.06) (2.36) DEC -0.5 0.61 0.02 -0.82 0.47 (-0.83) (0.95) (0.03) (-1.56) (1.17) (0.32)

Table 9 Continued Panel C: Separated by the ratio of current price to maximum price in the past one year VW&ALL(FF3) EW&ABM(FFE) LOW MID HIGH ALL 0.44 0.09 0.25 0.74 0.37 0.17 (2.06) (0.55) (1.53) (4.15) (2.96) (1.54) NOJAN 0.14 -0.1 0.16 0.62 0.24 0.01 (0.62) (-0.58) (0.90) (3.5) (1.79) (0.09) JAN 3.26 1.30 0.52 2.67 1.57 1.56 (4.35) (2.32) (1.17) (3.33) (3.51) DEC 0.32 0.3 0.59 -0.55 0.38 0.4 (0.59) (0.44) (1.00) (-0.99) (0.83) (1.26)

Panel D: Separated by institutional ownership Table 9 Continued Panel D: Separated by institutional ownership VW&ALL(FF3) EW&ABM(FF3) LOW MID HIGH ALL 0.25 0.15 0.55 0.36 0.48 0.45 (1.22) (0.83) (2.96) (2.05) (3.07) (2.82) NOJAN 0.19 -0.02 0.43 0.32 0.3 0.27 (0.89) (-0.12) (2.11) (1.82) (1.74) (1.63) JAN 1.36 1.3 2.61 1.72 2.12 2.67 (1.72) (2.59) (4.51) (2.12) (3.67) (4.55) DEC -1.06 -0.07 -0.50 -1.04 0.06 -0.11 (-1.38) (-0.11) (-0.79) (-1.7) (0.12) (-0.21)

Panel B: years with low and high tax rates for long-term capital gains Table 10 The Jan/Dec R&D premium in different tax regimes Panel A: years with low and high tax rates for short-term capital gains VW&ALL EW&ABM Low High DEC -1.81 1.08 -1.06 0.47 (-2.4) (1.52) (-1.25) (1.24) JAN 1.93 0.98 1.90 1.92 (4.67) (1.23) (3.3) (1.98) Panel B: years with low and high tax rates for long-term capital gains -0.7 0.72 -0.52 (-0.98) (1.09) (-0.94) (1.19) 1.2 1.96 1.65 2.84 (1.64) (2.75) (2.03) (5.19)

Table 11 December and Non-December Fiscal Year Ending ALL&VW (FF3) ABM&EW(FF3) Dec Non-Dec ALL 0.1 0.14 0.41 0.4 (0.67) (0.78) (3.22) (2.64) NOJAN -0.01 -0.02 0.29 0.27 (-0.09) (-0.13) (2.36) (1.79) JAN 1.11 2.21 1.7 2.02 (2.4) (2.89) (2.98) (3.23) JAN-NO JAN 1.13 2.24 1.41 1.74 (2.31) (2.85) (2.43) (2.71)

Table 12 Increase in R&D, Other intangible investment and physical investment Eberhart, Maxwell and Siddique (2004, JF): Firms unexpectedly increase their R&D by a significant amount earn higher future returns. Panel A: ALL&VW (FF3) INCREASE in R&D AD/MV OCA/AT CHANGE in AT CAPX/SALES INCREASE in CAPX ALL 0.52 0.04 0.43 -0.1 -0.04 -0.21 (1.82) (0.33) (4.47) (-1.27) (-0.47) (-1.3) NOJAN 0.26 0.11 0.45 -0.12 -0.07 -0.23 (0.88) (0.91) (4.52) (-1.64) (-0.7) (-1.41) JAN 3.47 -0.84 0.22 0.25 0.37 (2.61) (-1.61) (0.55) (0.66) (0.99) (0.46) DIFF 3.22 -0.95 -0.22 0.48 (2.37) (-1.77) (-0.53) (0.97) (1.13) (0.86)

Table 12 Continued Panel B: ABM&EW (FF3) INCREASE in R&D AD/MV OCA/AT CHANGE in AT CAPX/ SALES INCREASE in CAPX ALL 0.59 0.08 0.35 -0.32 -0.13 -0.30 (1.83) (0.82) (4.48) (-4.64) (-1.46) (-2.35) NOJAN 0.21 0.10 0.37 -0.35 -0.17 -0.33 (0.64) (0.96) (4.65) (-5.13) (-1.80) (-2.52) JAN 4.05 0.04 0.03 -0.22 0.34 -0.14 (2.79) (0.09) (-0.64) (1.12) (-0.38) DIFF 3.85 -0.06 -0.34 0.13 0.51 0.18 (2.59) (-0.15) (-1.03) (0.36) (1.61) (0.46)

Summary of Findings (1) Most or all of the R&D premium resides in January. (2) The January R&D premium is robust to all existing factors and to all scale variables. (3) The January R&D premium lasts up to 20 annual lags. (4) About 70% (100%) of the January R&D premium is earned during the first five (ten) trading days of January. (5) Ad, organizational capital, and physical investment do not exhibit the January phenomenon. (6) Tax loss-selling? (7) Risk explanation? (8) Mispricing? Puzzle???