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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.

Suggested Citation

  • 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
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    File URL: https://doi.org/10.1111/j.1755-053X.2008.00020.x
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    Cited by:

    1. 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.
    2. 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.
    3. repec:eee:respol:v:48:y:2019:i:6:p:1586-1600 is not listed on IDEAS
    4. 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.
    5. 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.
    6. repec:eee:jocaae:v:6:y:2010:i:2:p:61-76 is not listed on IDEAS
    7. repec:spr:reaccs:v:22:y:2017:i:4:d:10.1007_s11142-017-9412-4 is not listed on IDEAS

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