Penetrating the Book-to-Market Black Box: The R&D Effect
AbstractThe book-to-market (BM) phenomenon - the positive association between BM and subsequent returns - looms large among capital market enigmas. Economic theory postulates that the difference between market and book values of companies reflects their future abnormal profits. We capture these abnormal profits for a large sample of science-based companies by estimating the value of the off-balance sheet investment generating those profits - the value of R&D capital - and show empirically: (i) Firms' R&D capital is associated with their subsequent stock returns. (ii) For R&D intensive firms, this 'R&D effect' subsumes the 'book-to-market effect.' (iii) The association between R&D and subsequent returns appears to result from an extra-market risk factor inherent in R&D, rather than from stock mispricing. We thus provide an explanation for the book-to-market phenomenon of R&D companies. Copyright Blackwell Publishers Ltd 1999.
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Bibliographic InfoArticle provided by Wiley Blackwell in its journal Journal of Business Finance & Accounting.
Volume (Year): 26 (1999-04)
Issue (Month): 3-4 ()
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0306-686X
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