RD Risks and Overreaction in a Market where

R&D, Risks and Overreaction in a Market where the Book-to-Market Effect is Reputedly Absent by Sheng-Tang Huang Weifeng Hung Chaoshin Chiao Tung-Liang Liao Discussant K. C. John Wei HKUST 2010 NTU Conference, December 10, 2010 1

Summary of findings • In the whole sample, there is no book-to-market effect in Taiwan as documented by Chiu and Wei (1998) and others • However, in a subsample of firms with low R&Dto-sales ratios, there does exist the book-to-market effect – Explanation: the book-to-market effect arises from fundamental reversal, which is caused investor overreaction as suggested by Lakonishok, Shleifer, and Vishny (1994). 2

Comments and Suggestions • Although there is no value premium in Taiwan as a whole, this study digs deep to find that there does exit a value premium in a subsample of firms with low R&D intensity. • I find the results of the paper interesting. 3

Comments and Suggestions • However, theoretical link between the empirical results and theory is quite weak. – What are the reasons that R&D can affect the book-tomarket effect? – If your argument is correct, we should also observe that the value premium should be very weak in the Nasdaq firms. But I do not think that it is the case. 4

Comments and Suggestions • Since your argument is mainly behavioral, then the behavior story predicts that the value premium should be stronger for firms with more information uncertainty. • However, your result seems to be inconsistent with this prediction. 5

Conclusion • It is an interesting paper that finds that the bookto-market effect does exist in low R&D firms • However, how to reconcile the empirical results and the prediction of a theory is a challenge 6