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The Stock Market Valuation of Research and Development Expenditures

  • Louis K.C. Chan
  • Josef Lakonishok
  • Theodore Sougiannis
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    We examine whether stock prices fully reflect the value of firms' intangible assets, focusing on research and development (R&D). Since intangible assets are not reported on financial statements under current U.S. accounting standards and R&D spending is expensed, the valuation problem may be especially challenging. Nonetheless we find that historically the stock returns of firms doing R&D on average matches the returns on firms with no R&D. For companies engaged in R&D, high R&D intensity has a distinctive effect on returns for two groups of stocks. Within the set of growth stocks, R&D-intensive stocks tend to out-perform stocks with little or no R&D. Companies with high R&D relative to equity market value (who tend to have poor past returns) show strong signs of mis-pricing. In both cases the market apparently fails to give sufficient credit for firms' R&D investments. Our exploratory investigation of the effects of advertising on returns yields similar results. We also provide evidence that R&D intensity is positively associated with return volatility, everything else equal. Insofar as the association reflects investors' lack of information about firms' R&D activity, increased accounting disclosure may be beneficial.

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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7223.

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    Date of creation: Jul 1999
    Date of revision:
    Publication status: published as Louis K. C. Chan, 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:nbr:nberwo:7223
    Note: AP
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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    1. Baily, Martin Neil, 1972. "Research and Development Costs and Returns: The U. S. Pharmaceutical Industry," Journal of Political Economy, University of Chicago Press, vol. 80(1), pages 70-85, Jan.-Feb..
    2. Bronwyn H. Hall & Clint Cumminq & Elizabeth S. Laderman & Joy Mundy, 1988. "The R&D Master File Documentation," NBER Technical Working Papers 0072, National Bureau of Economic Research, Inc.
    3. Chan, Louis K C & Hamao, Yasushi & Lakonishok, Josef, 1991. " Fundamentals and Stock Returns in Japan," Journal of Finance, American Finance Association, vol. 46(5), pages 1739-64, December.
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