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


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


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.

Suggested Citation

  • Pramod, Kumar Naik & Krishnan, Narayanan & Puja, Padhi, 2012. "R&D intensity and market valuation of firm: a study of R&D incurring manufacturing firms in India," MPRA Paper 37299, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:37299

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    References listed on IDEAS

    1. Connolly, Robert A. & Hirschey, Mark, 1988. "Market value and patents : A Bayesian approach," Economics Letters, Elsevier, vol. 27(1), pages 83-87.
    2. Zvi Griliches, 1984. "Market Value, R&D, and Patents," NBER Chapters,in: R&D, Patents, and Productivity, pages 249-252 National Bureau of Economic Research, Inc.
    3. 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.
    4. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 38(2), pages 112-134.
    5. Megna, Pamela & Klock, Mark, 1993. "The Impact on Intangible Capital on Tobin's q in the Semiconductor Industry," American Economic Review, American Economic Association, vol. 83(2), pages 265-269, May.
    6. Sarkar, Jayati & Sarkar, Subrata, 2009. "Multiple board appointments and firm performance in emerging economies: Evidence from India," Pacific-Basin Finance Journal, Elsevier, vol. 17(2), pages 271-293, April.
    7. 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, vol. 35(6), pages 675-681.
    8. Savita Bhat & K. Narayanan, 2009. "Technological Efforts, Firm Size and Exports in the Basic Chemical Industry in India," Oxford Development Studies, Taylor & Francis Journals, vol. 37(2), pages 145-169.
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    1. repec:eee:tefoso:v:125:y:2017:i:c:p:137-153 is not listed on IDEAS

    More about this item


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

    JEL classification:

    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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