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R&D intensity and market valuation of firm: a study of R&D incurring manufacturing firms in India

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  • Pramod, Kumar Naik
  • Krishnan, Narayanan
  • Puja, Padhi

Abstract

The present study examines the impact of R&D expenditure on market valuation of firm using Tobin’s q. The study uses firm level data for Indian manufacturing sector obtained from Prowess database of CMIE for the period 2001-2010. The study forms an unbalanced panel with 326 R&D incurring (reporting) firms and employs Pooled-OLS and fixed effects models to analyze the relationship between R&D investment and firm value. After controlling some firm specific variables the present study finds an inverted U-shaped relationship between R&D intensity and firm value indicating the diminishing marginal return to each rupee spent on R&D. This finding is consistent with the findings of Huang and Liu (2005) for Taiwan and Bracker and Krishnan (2011) for US. It indicates that, R&D investment have a positive impact on the market value of firm at the beginning, but, when the investment exceeds an optimal level, these investments lower the firm value.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 37299.

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Date of creation: 29 Feb 2012
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Handle: RePEc:pra:mprapa:37299

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Keywords: R&D intensity; Firm value; Tobin’s q; Manufacturing firms;

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  1. Connolly, Robert A. & Hirschey, Mark, 1988. "Market value and patents : A Bayesian approach," Economics Letters, Elsevier, Elsevier, vol. 27(1), pages 83-87.
  2. Megna, Pamela & Klock, Mark, 1993. "The Impact on Intangible Capital on Tobin's q in the Semiconductor Industry," American Economic Review, American Economic Association, American Economic Association, vol. 83(2), pages 265-69, May.
  3. Sarkar, Jayati & Sarkar, Subrata, 2009. "Multiple board appointments and firm performance in emerging economies: Evidence from India," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 17(2), pages 271-293, April.
  4. B. L. Pandit & N. S. Siddharthan, 2003. "MNEs and market valuation of firms: a cross-sectional study of Indian electrical and electronic goods manufacturing firms," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 35(6), pages 675-681.
  5. Bhattacharyya, Surajit & Saxena, Arunima, 2009. "Does the Firm Size Matter? An Empirical Enquiry into the Performance of Indian Manufacturing Firms," MPRA Paper 13029, University Library of Munich, Germany.
  6. J. A. Hausman, 1976. "Specification Tests in Econometrics," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 185, Massachusetts Institute of Technology (MIT), Department of Economics.
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