R&D Expenditure and Firm Valuation: Evidence from Europe

28 Pages Posted: 22 Aug 2010

See all articles by Andi Duqi

Andi Duqi

University of Bologna

Giuseppe Torluccio

University of Bologna - Department of Management; Università degli studi di Modena e Reggio Emilia (UNIMORE) - Center for Research in Banking and Finance (CEFIN)

Date Written: August 20, 2010


We investigate the relationship between research and development expenditures and the market value of European listed companies that continuously implemented R&D over the 2001-2007 period. According to the theory of efficient financial markets, investors should correctly value tangible and intangible firm assets and these valuations should therefore be reflected in the market value of any company. This relation is of particular importance to researchers and has been studied using different approaches since the 80’s. Unfortunately, the contributions are strongly focused on US and UK firms due to the relevance and liquidity of the financial markets of these countries. There are few comparative studies for Continental European countries such as Germany, France, Italy or Sweden, as a result of the opacity of information, the less developed financial markets and the limited number of listed firms.

The study, using two econometric specifications, examines different characteristics of companies such as operative income, market share, debt to equity ratio, firm size and sales. To control for the way firms account their R&D expenditure, the IAS accounting standard variable is used, namely, the total expensing of these costs in the year they were incurred instead of capitalizing them. We also control for specific country and industry effects.

The results confirm the strong positive and significant influence of R&D expenditure on firm market value. We find the same effect when considering residual income. Nevertheless, the relevance of this effect differs among different countries. In addition, the evidence shows that younger and smaller firms that operate in hi-tech markets are able to spend more efficiently in research and development: the effect of R&D investment on firm market value in these types of companies is stronger compared to older and low-tech industry sectors. The robustness check, which considers different definitions of the dependent variable, reinforces the evidence that R&D expenditure has a significant and positive impact on the stock prices of European companies.

Keywords: Research and Development Expenditure, Market Value, Valuation, European Financial Markets, R&D

JEL Classification: G14, G31, M41, O32

Suggested Citation

Duqi, Andi and Torluccio, Giuseppe, R&D Expenditure and Firm Valuation: Evidence from Europe (August 20, 2010). 23rd Australasian Finance and Banking Conference 2010 Paper. Available at SSRN: https://ssrn.com/abstract=1663205 or http://dx.doi.org/10.2139/ssrn.1663205

Andi Duqi

University of Bologna ( email )

University of Bologna
Department of Management
Bologna, Bologna 40126

Giuseppe Torluccio (Contact Author)

University of Bologna - Department of Management ( email )

via Capo di Lucca 34
40126 Bologna
+39 051 2098085 (Phone)


Università degli studi di Modena e Reggio Emilia (UNIMORE) - Center for Research in Banking and Finance (CEFIN) ( email )

via Berengario 51
Modena, modena I-41100

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