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.

ACKNOWLEDGEMENTS I
ABSTRACT II
TABLE OF CONTENTS III
LIST OF TABLES V
LIST OF FIGURES VI
CHAPTER ONE 1
INTRODUCTION 1
1.1 Research Background and Motivation. 1
1.2 Research Objective and Contribution. 4
1.3 Structure of Research. 5
CHAPTER TWO 6
LITERATURE REVIEW 6
2.1 Benefit of Absorptive Capacity. 6
2.2 Cost of Absorptive Capacity. 8
2.3 Explorative vs. Exploitative. 9
CHAPTER THREE 14
RESEARCH DESIGN AND METHODOLOGY 14
3.1 Data Source & Sample. 14
3.2 Empirical Methodology. 15
3.2.1 Independent Variable. 16
3.2.2 Control Variable. 18
3.2.3 Cross-sectional Regression Analysis. 20
CHAPTER FOUR 22
RESEARCH RESULTS 22
4.1 Sample Description. 22
4.2 Announcement Effects of R&D Expenditure Increased. 27
4.3 Cross-sectional Regression Analysis. 28
CHAPTER FIVE 32
CONCLUSION 32
5.1 Research Conclusion. 32
5.2 Research Contribution. 34
5.3 Research Limitation and Suggestion for Future Research. 34
REFERENCES 36

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