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The Stock Market Valuation of Research and Development Expenditures

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  • Louis K. C. Chan
  • Josef Lakonishok
  • Theodore Sougiannis

Abstract

We examine whether stock prices fully value firms' intangible assets, specifically research and development (R&D). Under current U.S. accounting standards, financial statements do not report intangible assets and R&D spending is expensed. Nonetheless, the average historical stock returns of firms doing R&D matches the returns of firms without R&D. However, the market is apparently too pessimistic about beaten‐down R&D‐intensive technology stocks' prospects. Companies with high R&D to equity market value (which tend to have poor past returns) earn large excess returns. A similar relation exists between advertising and stock returns. R&D intensity is positively associated with return volatility.

Suggested Citation

  • Louis K. C. Chan & Josef Lakonishok & Theodore Sougiannis, 2001. "The Stock Market Valuation of Research and Development Expenditures," Journal of Finance, American Finance Association, vol. 56(6), pages 2431-2456, December.
    • Handle: RePEc:bla:jfinan:v:56:y:2001:i:6:p:2431-2456
    DOI: 10.1111/0022-1082.00411
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