Size and value effects in high-tech industries: The role of R&D investment

We use monthly US stock data over 55 years from 1962 to 2017 to show that the R&D intensity at firms adds another important dimension to the size and value effects in describing stock returns, especially for small high-tech firms. A trading strategy that double sorts on R&D intensity and size or book-to-market ratio outperforms a simple small-minus-big (SMB) or high-minus-low (HML) strategy in producing higher and more significant portfolio returns. The most profitable schemes involve triple sorts by size, BM, and R&D intensity: the payoffs of buying high-BM/R&D-Active portfolio and selling low-BM/R&D-Inactive portfolio in the small-size/high-tech group and that of buying high-tech/high-BM and selling low-tech/low-BM in the small-size/R&D-active group generate a return of more than 2% on a monthly basis. Our results are robust to alternative classification method of assigning stocks in portfolios.