The Valuation of R&D Expenditures in Japan

Abstract

The difficulty to measure the long-term benefits of R&D expenditures and the distortions induced by R&D accounting suggest that R&D-intensive firms could be undervalued. Using several methods commonly-applied to detect the abnormal returns associated with mispricing, we find no evidence that the value of R&D investments has been underestimated in the Japanese stock market. Although the performance of R&D-intensive firms appears to vary with the overall market direction, the influence of R&D expenditures in monthly cross-sectional regressions is insignificant. Portfolios sorted by R&D intensity also produce insignificant excess returns after controlling for standard risk factors. Given that R&D accounting rules in Japan are similar to those in the US, the results appear to reject the hypothesis that they are the cause of the undervaluation of R&D investments.

Keywords: R&D expenses, accounting distortions, mispricing, abnormal returns

JEL Classification: G14