Do Stock Markets Value Innovation? A Meta-Analysis

Abstract

We analyze whether stock markets value innovation by performing a meta-analysis of the empirical literature linking R&D investments and firms' market value. While there is an increasing interest in the attention paid by financial markets to firm level innovation activities, the theoretical debate and the empirical results presented by a growing number of studies performed within different disciplinary domains still oscillate between markets myopia and markets efficiency. We contribute to resolve this indecision applying Hunter and Schmidt (1990) correction procedures on existing studies estimating the impact of different corporate assets on the market value of the firm. After correcting for random sources of variations and possible problems with the reliability of the independent and the dependent variables, we show that the R&D-market value relationship is consistently positive and that the market values one currency unit invested in R&D activities as much or more than one currency unity invested in tangible assets. Moreover, we use a fully factorial regression model to assess the magnitude of the reported coefficients against a set of sample specific and design specific variables. Our results show that, when other intangible assets are considered, the market valuation of firms' R&D investments generally lowers. Moreover, whereas adding industry-level controls seems to better specify the relationship between R&D investment and market value, firm-level variables do not substantially affect the results. Implications for research and practice are presented and discussed.

Keywords: R&D, Market Value, Metanalysis, Innovation

JEL Classification: G23, O16, O31