TY  - JOUR
AU  - Chan,Louis K.C.
AU  - Lakonishok,Josef
AU  - Sougiannis,Theodore
TI  - The Stock Market Valuation of Research and Development Expenditures
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7223
PY  - 1999
Y2  - July 1999
UR  - http://www.nber.org/papers/w7223
L1  - http://www.nber.org/papers/w7223.pdf
N1  - Author contact info:
Louis Chan
Department of Finance
University of Illinois
113 Commerce West, MC 706
1206 S. Sixth
Champaign, IL 61820
Tel: 217/333-6391
E-Mail: l-chan2@uiuc.edu

Josef Lakonishok
University of Illinois, Department of Finance
College of Commerce & Business Administration
1206 S. Sixth Street
Champaign, IL 61820
Tel: 217/333-7185
Fax: 217/244-1151
E-Mail: jlakonishok@yahoo.com
AB  - 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.
ER  -