The Valuation Implications of Strategy in R&D-Intensive Industries
Journal of Applied Accounting Research, Forthcoming
Posted: 21 Jan 2018
Date Written: January 16, 2018
Purpose – The primary research purpose of this study is to investigate the valuation impact of firm’s strategic choices in a setting of intangibles-rich industries.
Design/Methodology/Approach – We adopt the conceptual framework of Miles and Snow (1978, 2003), which identifies three viable types of firms based on their organizational strategy profiles: Defenders, Prospectors, and Analyzers. We use a replicable strategy score, whose scoring convention is based on rolling ratings of six ratios for the previous four years (Bentley et al., 2013), to distinguish between prospector and defender strategies.
Findings – We offer empirical evidence that supports the hypothesis that prospector strategies are positively associated with firm value in the industries of Electronics & Electrical Equipment, Pharmaceuticals & Biotechnology, and Technology Hardware & Equipment. We do not find evidence to support such a relationship in the Software & Computer Services sector.
Research Limitations/Implications – The results of this study have significant implications for researchers, who adopt a market-based accounting research framework to examine the characteristics, performance and valuation of firms with different strategic orientation.
Practical Implications – The findings of this paper are useful to managers, who would like to pursue a value-adding strategy in dynamic industrial environments that are characterized by high levels of innovation, risk, and growth.
Originality/Value – Although previous studies have yielded mixed results with respect to the association between firm’s performance and prospector strategy, we identify a set of R&D-intensive industries, where the implementation of the prospector strategy adds significant value to the shareholders’ wealth.
Keywords: Value Relevance, Business Strategy, Prospectors, Defenders, Intangibles, Research And Development
JEL Classification: G32, M41, M21, M10
Suggested Citation: Suggested Citation