FINANCE Corporate financial policy and R and D Management

Momentum

1.RSTR: Relative strength. This is computed as the cumulative excess re-
turn (using continuously compounded monthly returns) over the past 12
months—that is,

where ri,tis the arithmetic return of the stock in month i, and rf,tis the
arithmetic risk-free rate for month i. This measure is usually computed
over the past one year—that is, Tis set equal to 12 months.

2.HALPHA: Historical alpha. This descriptor is equal to the alpha term
(i.e., the intercept term) from a 60-month regression of the stock’s excess
returns on the S&P 500 excess returns.

Size

1.LNCAP: Log of market capitalization. This descriptor is computed as
the log of the market capitalization of equity (price times number of shares
outstanding) for the company.

Size Nonlinearity

1.LCAPCB: Cube of the log of market capitalization. This risk index is
computed as the cube of the normalized log of market capitalization.

Trading Activity

1.STOA: Share turnover over the past year. STOA is the annualized share
turnover rate using data from the past 12 months—that is, it is equal to
Vann/N

• out, where Vannis the total trading volume (in number of shares) over
  the past 12 months and N


• 
  

  outis the average number of shares outstanding
  over the previous 12 months (i.e., it is equal to the average value of the
  number of shares outstanding at the beginning of each month over the pre-
  vious 12 months).

  
  

2.STOQ: Share turnover over the past quarter. This is computed as the
annualized share turnover rate using data from the most recent quarter.
Let Vqbe the total trading volume (in number of shares) over the most re-
cent quarter and let N

• outbe the average number of shares outstanding over

RSTR=+−+

==

∑∑log(^11 ,,) log( )

11

rrit

t

T

ft

t

T

Appendix 8.B 229