Two contrasting explanations are offered in the literature for the R&D-to-market anomaly: limited investor attention to R&D spending that is expensed under generally accepted accounting principles or failure of conventional risk factors to completely capture the risk associated with R&D. Exploiting accounting treatments in Korea, in which R&D expenditures are capitalized under certain conditions, we show that both the expensed and capitalized portions of R&D are positively associated with returns. The positive R&D-return relationship weakens with the extent of progress toward completion of R&D projects, consistent with Berk, Green, and Naik’s (2004) risk-based theoretical prediction. In addition, the decrease in returns following progress toward R&D completion is fully explained by conventional risk factors. The results suggest overall that the positive R&Dreturn relationship is attributable to compensation for bearing risk. 

Keywords: R&D, risk premium, mispricing, R&D capitalization
JEL classification: G12,O32​