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The Stock Market Valuation of Research and Development Expenditures

43 Pages Posted: 3 Jan 2000  

Louis K.C. Chan

University of Illinois at Urbana-Champaign - Department of Finance

Josef Lakonishok

University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

Theodore Sougiannis

University of Illinois at Urbana-Champaign - Department of Accountancy

Multiple version iconThere are 2 versions of this paper

Date Written: June 1999

Abstract

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.

JEL Classification: G12, G14, M41, M44

Suggested Citation

Chan, Louis K.C. and Lakonishok, Josef and Sougiannis, Theodore, The Stock Market Valuation of Research and Development Expenditures (June 1999). Available at SSRN: https://ssrn.com/abstract=195488 or http://dx.doi.org/10.2139/ssrn.195488

Louis Chan (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-333-6391 (Phone)
217-244-3102 (Fax)

Josef Lakonishok

University of Illinois at Urbana-Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-333-7185 (Phone)
217-244-3102 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Theodore Sougiannis

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

360 Wohlers Hall
1206 South Sixth Street
Champaign, IL 61820
United States
217-244-0555 (Phone)
217-244-0902 (Fax)

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