NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Stock Market Valuation of Research and Development Expenditures

Louis K.C. Chan, Josef Lakonishok, Theodore Sougiannis

NBER Working Paper No. 7223
Issued in July 1999
NBER Program(s):   AP

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.

download in pdf format
   (665 K)

email paper

This paper is available as PDF (665 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w7223

Published: Louis K. C. Chan, 2001. "The Stock Market Valuation of Research and Development Expenditures," Journal of Finance, American Finance Association, vol. 56(6), pages 2431-2456, December.

Users who downloaded this paper also downloaded these:
Griliches Issues in Assessing the Contribution of Research and Development to Productivity Growth
Nicholson w9649 Barriers to Entering Medical Specialties
Jones w9325 Why Have Health Expenditures as a Share fo GDP Risen So Much?
Hall w8773 The Financing of Research and Development
Campbell and Shiller w8221 Valuation Ratios and the Long-Run Stock Market Outlook: An Update
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us