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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." Copyright (c) 2008 Financial Management Association International..

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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    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. 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.
    4. 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.
    5. repec:eee:jocaae:v:6:y:2010:i:2:p:61-76 is not listed on IDEAS
    6. 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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