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Penetrating the Book-to-Market Black Box: The R&D Effect


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  • Baruch Lev

    (New York University, USA,)

  • Theodore Sougiannis
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    The 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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    Article provided by Wiley Blackwell in its journal Journal of Business Finance & Accounting.

    Volume (Year): 26 (1999-04)
    Issue (Month): 3-4 ()
    Pages: 419-449

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    Handle: RePEc:bla:jbfnac:v:26:y:1999-04:i:3-4:p:419-449

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    Cited by:
    1. Cazavan-Jeny, Anne, 2003. "Value-relevance of expensed and capitalized intangibles - a French survey," ESSEC Working Papers DR 03022, ESSEC Research Center, ESSEC Business School.
    2. Gaëlle Lenormand & Lionel Touchais, 2008. "La pertinence des actifs incorporels avec les IFRS," Revue Finance Contrôle Stratégie,, vol. 11(2), pages 173-201, June.
    3. Paugam, Luc, 2011. "Valorisation et reporting du goodwill : enjeux théoriques et empiriques," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/8007 edited by Casta, Jean-François, September.
    4. Farjaudon, Anne-Laure & Jaoued-Abassi, Leyla, 2010. "Valeur marketing et valeur financière de la marque : Vers un modèle intégrateur," Economics Papers from University Paris Dauphine 123456789/5893, Paris Dauphine University.
    5. Aslihan E. Bozcuk, 2012. "Internet financial reporting: Turkish companies adapt to change," Managerial Finance, Emerald Group Publishing, vol. 38(8), pages 786-800, August.
    6. Ester Oliveras & Oriol Amat, 2003. "Ethics and creative accounting: Some empirical evidence on accounting for intangibles in Spain," Economics Working Papers 732, Department of Economics and Business, Universitat Pompeu Fabra.
    7. Constant Djama & Guillaume Dumas & Isabelle Martinez, 2013. "Entreprises innovantes et gestion des résultats comptables," Post-Print hal-01002932, HAL.
    8. Corinne Bessieux-Ollier & Marie Chavent & Vanessa Kuentz & Elisabeth Walliser, 2010. "L'adoption en France des normes IFRS relatives aux incorporels : bouleversement des pratiques ou inertie ?," Post-Print halshs-00526410, HAL.
    9. Anne-Laure Farjaudon, 2006. "L'évaluation des marques, au carrefour des recherches en comptabilité, finance, contrôle de gestion et marketing," Post-Print halshs-00548127, HAL.
    10. Ana Cunha & José Moreira, 2010. "Relevância informativa das Despesas de Investigação e Desenvolvimento: um estudo para o caso português," Notas Económicas, Faculdade de Economia, Universidade de Coimbra, issue 31, pages 06-23, June.
    11. Corinne Bessieux-Ollier & Marie Chavent & Vanessa Kuentz & Elisabeth Walliser, 2012. "The mandatory adoption of IFRS on intangibles: upheaval or inertia? The case of France," International Journal of Accounting, Auditing and Performance Evaluation, Inderscience Enterprises Ltd, vol. 8(1), pages 91-113.
    12. Debreceny, Roger & Rahman, Asheq, 2005. "Firm-specific determinants of continuous corporate disclosures," The International Journal of Accounting, Elsevier, vol. 40(3), pages 249-278.
    13. Cazavan-Jeny , Anne & Jeanjean, Thomas, 2003. "Value Relevance of R&D Reporting : A Signaling Interpretation," ESSEC Working Papers DR 03021, ESSEC Research Center, ESSEC Business School.


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