Evidence of mispricing for South African listed R&D firms contributed by accounting conservatism

Abstract

Purpose: The purpose of this research is to investigate the impact of capitalization of research and development on the valuation of equities for listed firms in South Africa.Design/methodology: 15 years of financial data (2000 to 2014) was collected, and portfolios with similar price-to-book and market size ratios were formed to find any evidence of any postinvestment excess returns and the association to the level of research and development investment. Portfolios were re-formed and annually ranked by their research and development intensity relative to sales. In addition, we looked at the changes in excess returns after adjusting the book value as a result of capitalizing R&D expenditure, to see if the distortion imposed by expensing R&D contributed to the under-valuation of firms that invest in R&D. Findings:The results indicate that firms that invest in research and development are systematically under-valued. We found no evidence of any positive association between the post-investment excess returns and investment levels, but rather found evidence of the glamour stock phenomenon in highly intensive research and development firms. Research limitations/implications:The sample data is limited to listed firms in South Africa, and for firms with intermittently omitted R&D on their financial report, we have assumed that such expenditure is zero for the non-disclosed period for the purpose of capitalization and