R&D expenses and firm valuation: a literature review

Abstract

PurposeThe purpose of this paper is to provide a comprehensive review of the literature on R&D expenses and subsequent firm valuation and to briefly highlight some gaps and implications for future research.Design/methodology/approachThe approach is a review of studies on R&D and valuation between 1978 and 2007. The valuation issues have been grouped into general topics identified among the overall volume of research: economic characteristics, actual and forecast firm performance, capital structure, risk, and other topics which do not fit into the previous categories.FindingsThe paper provides a comprehensive assessment of the literature findings on a variation of valuation topics useful for internal and external users of financial statements of firms intensive in R&D investments. It sheds light on certain literature limitations and thus guides the users of financial statements regarding to which issues they should pay attention when analysing the financial statements of firms intensive in R&D.Research limitations/implicationsExisting research on R&D and valuation focuses mainly on the USA and UK and therefore raises issues of generalisation of the results.Practical implicationsThe paper provides a useful guide for the users of financial statements of R&D intensive firms, since it provides information on possible consequences of these expenses regarding a variety of valuation issues.Originality/valueThe paper fills an information gap by addressing a range of valuation issues on R&D and offers relevant information guidance to the users of financial statements.

Industry concentration, excess returns and innovation in Australia

“…(), Al‐Horani et al . ; survey Anagnostopoulou, ) find a positive and significant relationship between innovation expenditure and excess stock returns. The literature posits two alternative explanations for this relationship (survey Zhang, ); investors underprice the implied positive abnormal cash flows arising from innovation investment and subsequent excess stock returns arise from positive earnings surprises (Chan et al ., ; Ciftci et al ., ).…”

The effects of the chief technology officer and firm and industry R&D intensity on organizational performance

“…Firms mobilizing technology for competitive advantage must also consider the size of their R&D budgets. The evidence on the effects of R&D expenditure on firm performance is mixed (Anagnostopoulou, ; Eberhart, Maxwell and Siddique, ; Link and Wright, ). One explanation for the mixed evidence is that R&D expenditures must be complemented with effective technology management if they are to have a positive effect and management was not considered in these studies of R&D expenditures (Wolff, ).…”

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

“…Evidence suggests that markets perceive the risk of a R&D investment to be on average three times larger than an investment on capital expenditure (Anagnostopoulou, 2008). Extant literature also points towards firms with higher R&D intensity having greater systematic risk than less intensive firms due to business cycle fluctuations (Ciftci, Lev & Radhakrishnan, 2009;Penman & Zhang, 2012).…”

“…The practice of continuously developing and commercializing innovative products has proven to be a lucrative strategy for industry leaders, with companies such as Disney, Nintendo, Microsoft and Apple demonstrating that they are better equipped to compete against disruptive innovation by continually building intellectual capital (Habtay, 2012). R&D thus plays an important role in stimulating innovation and economic growth, and has become critical to maintaining a competitive advantage in contemporary economies (Anagnostopoulou, 2008;Faff, Ho, Lin & Yap, 2013;Li, 2012;Park, Chung & Kim, 2014;Sorescu, Chandy & Prabhu, 2003). The exact economic value of a R&D investment however, is difficult to determine, because of the risky nature of R&D and the uncertainty of the future benefit of a R&D activity.…”

“…Thefield of researchon the value-relevance of R&D has its basis in the positive theory of accounting, which seeks to explain and predict the accounting practices of firms (Watts & Zimmerman, 1990). The focus of extant research has been on the increased value-relevance of capitalizing R&D into a firm's asset base rather than expensing it in the income statement (Aboody & Lev, 1998;Anagnostopoulou, 2008;Kothari et al, 2002;Park et al, 2014). This is mainly driven by the association proven in extant research between a R&D investment and the future stock returns, as well as between the level of R&D investment and subsequent abnormal excess returns (Bhana, 2013;Chambers, Jennings & Thompson II, 2002;Chan, 2012;Chan, Lakonishok & Sougiannis, 2001;Eberhart, Maxwell & Siddique, 2004;Lev & Sougiannis, 1996;Lev, Sarath & Sougiannis, 2005).…”