The Stock Market Valuation of Research and Development Expenditures
Louis K.C. Chan***University of Illinois at Urbana-ChampaignJosef LakonishokUniversity of Illinois at Urbana-Champaign and NBERTheodore SougiannisUniversity of Illinois at Urbana‐Champaign and the Athens Laboratory of Business Administration (ALBA)
2001en
ABI
Abstract
ABSTRACT We examine whether stock prices fully value firms' intangible assets, specifically research and development (R&D). Under current U.S. accounting standards, financial statements do not report intangible assets and R&D spending is expensed. Nonetheless, the average historical stock returns of firms doing R&D matches the returns of firms without R&D. However, the market is apparently too pessimistic about beaten‐down R&D‐intensive technology stocks' prospects. Companies with high R&D to equity market value (which tend to have poor past returns) earn large excess returns. A similar relation exists between advertising and stock returns. R&D intensity is positively associated with return volatility.
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