Date of Award


Document Type

Campus Access Dissertation


Moore School of Business

First Advisor

Jean Helwege


My dissertation is composed of two papers on R&D investment, and another paper on the cross section of stock returns.

Chapter One investigates the effect of legal shareholder protection on the efficiency of corporate R&D investment. The main finding is that institutional protection of shareholder benefits reduces both underinvestment and overinvestment in R&D projects. If shareholder protection rises from the weakest to the strongest, R&D investment will increase by up to 96% for firms that may underinvest, but will decrease by as large as 84% for firms which may overinvest. Shareholder rights also exert large influences on the R&D investment sensitivities to cash flow and to Tobin's Q, and the effects depend critically on firms' tendency to under- or overinvest. In addition, shareholder protection boosts the growth of R&D intensive industries. The results consistently show that by expanding firms' access to external financing and reducing insiders' incentives for private benefits, strong legal shareholder protection can significantly improve the efficiency of corporate R&D investment around the world.

Chapter Two shows that national culture also has significant impact on firm innovation. The key emphasis is that individualism significantly increases the level of corporate R&D investment. In addition, firms in individualistic countries (1) not only invest more in R&D but also choose more risky R&D projects; (2) although investing more in R&D (risky assets), do not have more capital expenditure (less risky) but hold less cash (safest assets); (3) when industry Tobin's Q rises, increase R&D to a larger extent, do not do so with capital expenditure and cut more dividends; and (4) are more likely to use excess cash to increase R&D than to increase capital expenditure and dividends. These findings are consistent with that individualism increases corporate R&D investment through encouraging firm risk taking.

Chapter Three focuses on the cross section of stock returns. With private information about their customers' prospects, suppliers extend trade credit to capture future profitable business. We show that this information advantage generates significant return predictability. After controlling for major firm characteristics, firms that rely more on trade credit relative to debt financing have higher subsequent stock returns. This return predictability persists in both US and non-US developed markets. A large fraction of the return predictability comes from the ability of trade credit to predict sales growth beyond what the market has already priced, lending support to the notion that suppliers' information diffuses only gradually across the investing public.