The study discovers the effects of the absorptive capacity of exploration and exploitation on the market reactions to R&D increase announcements. We expect that firms with greater absorptive capacity of exploration (ACE) and/or absorptive capacity of exploitation (ACEi) generate more market returns when firms announce R&D expenditure. Moreover, we also expect that the firms get more positive reaction from the market in the case of absorptive capacity of exploration than in the case of absorptive capacity of exploitation when the increase of R&D expenditure is announced.
The study examines 226 firms which announce the R&D expenditure and the results show that the market negatively reacts to firms with greater ACEi in the window period (-10, 10), but positively reacts to firms with greater ACE when those firms announce the increase of R&D. Furthermore, the result supports the argument that firms with greater ACE generate more returns than firms with ACEi.

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