Discussion of “Is Research and Development Mispriced or Properly Risk Adjusted?”

Mustafa Ciftci, Baruch Lev, and Suresh Radhakrishnan (2011) provide an interesting and innovative look at the question of mispricing and compensation for bearing risk related to research and development (R&D) intensity. They introduce a number of significant contributions to this literature. They partition their sample based on R&D strategy, and test for both business and information risk. They find differences in the returns for bearing business and information risk across their strategy sample partitions. They also find evidence that firms following an innovative R&D strategy are underpriced by the market.