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Earnings and Equity Valuation in the Biotech Industry: Theory and Evidence

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  • Philip Joos
  • Alexei Zhdanov

Abstract

We examine how the price‐earnings relation varies with the uncertainty about and the quality of a firm's investments. We develop a real option valuation framework to capture investment and abandonment options in the research‐intensive biotechnology industry. We hypothesize that the price‐earnings relation will be V‐shaped and change over the firm's life cycle. We also show how nonfinancial information affects the pricing of earnings. Our empirical findings are based on a sample of 301 biotechnology firms that made IPOs between 1980 and 2000, and are generally consistent with our predictions.

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  • Philip Joos & Alexei Zhdanov, 2008. "Earnings and Equity Valuation in the Biotech Industry: Theory and Evidence," Financial Management, Financial Management Association International, vol. 37(3), pages 431-460, September.
    • Handle: RePEc:bla:finmgt:v:37:y:2008:i:3:p:431-460
    DOI: 10.1111/j.1755-053X.2008.00020.x
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    2. Ahçi, Mustafa, 2023. "Essays on corporate disclosures, innovation, and investments," Other publications TiSEM 0dddb5f7-17e1-41ba-97da-0, Tilburg University, School of Economics and Management.
    3. de Leeuw, Tim & Gilsing, Victor & Duysters, Geert, 2019. "Greater adaptivity or greater control? Adaptation of IOR portfolios in response to technological change," Research Policy, Elsevier, vol. 48(6), pages 1586-1600.
    4. Elizabeth Demers & Philip Joos, 2007. "IPO Failure Risk," Journal of Accounting Research, Wiley Blackwell, vol. 45(2), pages 333-371, May.
    5. Tatiana Fedyk & Zvi Singer & Mark Soliman, 2017. "The sharpest tool in the shed: IPO financial statement management of STEM vs. non-STEM firms," Review of Accounting Studies, Springer, vol. 22(4), pages 1541-1581, December.
    6. Borgonovo, E. & Gatti, S. & Peccati, L., 2010. "What drives value creation in investment projects? An application of sensitivity analysis to project finance transactions," European Journal of Operational Research, Elsevier, vol. 205(1), pages 227-236, August.
    7. Erden, Zeynep & Klang, David & Sydler, Renato & von Krogh, Georg, 2014. "Knowledge-flows and firm performance," Journal of Business Research, Elsevier, vol. 67(1), pages 2777-2785.
    8. Leda Nath & Lori Holder-Webb & Jeffrey Cohen, 2013. "Will Women Lead the Way? Differences in Demand for Corporate Social Responsibility Information for Investment Decisions," Journal of Business Ethics, Springer, vol. 118(1), pages 85-102, November.
    9. Beyer, Anne & Cohen, Daniel A. & Lys, Thomas Z. & Walther, Beverly R., 2010. "The financial reporting environment: Review of the recent literature," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 296-343, December.
    10. Callen, Jeffrey L. & Gavious, Ilanit & Segal, Dan, 2010. "The complementary relationship between financial and non-financial information in the biotechnology industry and the degree of investor sophistication," Journal of Contemporary Accounting and Economics, Elsevier, vol. 6(2), pages 61-76.

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