How Do Firm Characteristics Influence the Relationship between R&D and Firm Value?

Abstract

"This paper focuses on how a firm's characteristics affect the market valuation of its research and development (R&D) spending. We derive a valuation model based on the capital market arbitrage condition. Using the generalized method of moments and data from the Eurozone countries to estimate this model yields interesting results. Several firm characteristics (size, firm growth, and market share) positively affect the relationship between firm value and R&D spending, while others (free cash flow, dependence on external finance, labor intensity, and capital intensity) exert a negative effect. Therefore, we conclude that the effectiveness of R&D spending depends on firm characteristics". Copyright (c) 2010 Financial Management Association International.

The Role of R&D Expenses for Profitability: Evidence from U.S. Fossil and Renewable Energy Firms

“…A number of studies show that R&D expenses have a consistent and positive effect on the profitability of a firm (Chan, 2001;Roberts, 2001;Shah, 2008;Ehie, 2010;Pindado, 2010). Shah (2008) makes use of a sample of U.K. manufacturing firms over the period 1998 to 2002; his empirical findings provide strong support for a positive association between R&D expenses and market values.…”

“…According to theoretical arguments, free cash flows may have both a positive and a negative effect on market values. Pindado (2010) argues that cash flows are expected to have a negative impact on market values; his argument is based on the documentation that when firms experience high levels of cash flows, they use this type of funding for projects with a negative net present value, implying that these firms tend to undertake higher risks. By contrast, Chauvin and Hirschey (2001) show that cash flows have a positive impact on firms' market values.…”

“…Moreover, his results document that biotech firms tend to be more successful in their R&D efforts and for that reason they are valued higher than firms that fail to display a strong R&D record. Pindado (2010) argues on how a number of idiosyncratic firms' characteristics could affect the association between R&D expenses and firm values. His empirical findings highlight that although firms' size and stock prices display a positive association with R&D expenses, there are specific factors, such as external financial dependence, capital intensity, labor intensity, and free cash flows that display a negative association with R&D expenses.…”

How do country‐level governance characteristics impact the relationship between R&D and firm value?

“…All details on the definition and construction of these variables and indices can be found in Pindado et al. () and Hillier et al. ().…”

“…Pindado et al. () develop a model that accounts for these firm characteristics in the relation between R&D and market value and find that they play a moderating role in the market valuation of R&D investments. Thongpapanl et al.…”