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

2. 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.

3. 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.

4. 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???

5. 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

6. 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)

7. 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)

8. 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)

9. Table 4 Sub-sample Periods
Panel A: VW&ALL(FF3)
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)

10. Figure 1 The R&D premium by calendar year

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

12. 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)

13. 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)

14. 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)

15. 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)

16. 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)

17. 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)

18. 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)

19. 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)

20. 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)

21. 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)

22. 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)

23. 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)

24. 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)

25. 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)

26. 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)

27. 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???