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The Stock Market Valuation of R&D Leaders

54 Pages Posted: 8 Oct 2008  

Baruch Lev

New York University - Stern School of Business

Suresh Radhakrishnan

University of Texas at Dallas - School of Management

Mustafa Ciftci

American University of Sharjah - School of Business and Management

Date Written: March 2006

Abstract

We examine future excess returns, earnings variability and stock volatility of R&D Leaders and Followers. Drawing on the business strategy literature, which makes a clear distinction between R&D Leaders and Followers, we show that R&D Leaders do earn significant future excess returns, while R&D Followers just earn average returns. We further document that R&D Leaders generate higher future sales growth, and return-on-assets than Followers. We also tackle the perennial question of whether the excess returns subsequent to R&D are due to mispricing or risk, and show that only a small part of the returns can be attributed to risk compensation. Finally, it has been documented that R&D expenditures are strongly associated with future earnings volatility, suggesting that R&D is less reliable (verifiable) an asset than physical capital. We show that the association between R&D intensity and future earnings volatility of R&D Leaders is not lower than that of R&D Followers. Thus, penetrating the population of R&D firms to distinguish between R&D Leaders and Followers, we bridge the chasm between the major findings of the economics/finance strand and the accounting body of R&D research.

Suggested Citation

Lev, Baruch and Radhakrishnan , Suresh and Ciftci, Mustafa, The Stock Market Valuation of R&D Leaders (March 2006). NYU Working Paper No. BARUCH LEV-15. Available at SSRN: https://ssrn.com/abstract=1280696

Baruch Lev (Contact Author)

New York University - Stern School of Business ( email )

40 West 4th Street, Suite 400
New York, NY 10012
United States
212-998-0028 (Phone)
212-995-4001 (Fax)

HOME PAGE: http://www.baruch-lev.com

Suresh Radhakrishnan

University of Texas at Dallas - School of Management ( email )

2601 North Floyd Road
Richardson, TX 75083-0688
United States
972-883-4438 (Phone)
972-883-6811 (Fax)

Mustafa Ciftci

American University of Sharjah - School of Business and Management ( email )

P.O. Box 26666
Sharjah
United Arab Emirates

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