The Role of R&D Investment in Firm Valuation for Small and Medium Korean Companies

Abstract

As technology innovation gains attention as a key value-relevant factor, many researchers raise questions about the conventional assumption that the market value of equity is a linear function of technology innovation. This study takes the view that R&D, as a proxy for technology innovation, helps promote firm value in ways dependent on firms' characteristics and market structure. To explore this argument, this study collects data from small and medium companies listed on the Korean stock markets covering from 2001 to 2011. The results show that R&D contributes to the promotion of the market value of equity, which, as a proxy for firm value, is in turn found to be nonlinearly associated with R&D according to a firm's characteristics and market structure. This paper indicates the need to employ a nonlinear value relevance model in assessing the market value of equity as a function of the R&D investments of small and medium Korean companies.

Does the Riskiness of R&D Outweigh Its Benefits? The Perspective of US Private Lenders

“…There is also a large body of international evidence on R&D and how it is valued by markets (for a literature review, see Stark, 2008;and Wyatt, 2008). A number of studies find that R&D expenditures are positively associated with market value in the UK (Green et al, 1996;Stark and Thomas, 1998;Toivanen et al, 2002;Akbar and Stark, 2003;Shah et al, 2008;and Dedman et al, 2009), Korea (Cho et al 2008;and Kwon, 2014), Australia (Bosworth and Rogers, 2001), France and Germany (Hall and Oriani, 2006), and other European countries (Duqi and Torluccio, 2013), with the exception of Italy. Osma and Young (2009) document that R&D cuts are associated with market discounts in the UK, suggesting that investors consider R&D to be a value-generating investment.…”

Board Capitals, R&D and Leverage Strategies on Financial Performance

“…Increasing R&D expenditure has positive effects on stock price for a firm. In addition, there might be a nonlinear or inverted U-shaped relationship between R&D inputs and a firm's financial performance (Huang and Liu, 2005;Wang, 2011;Kwon, 2014;Saad and Zantout, 2014;Kuo et al, 2018), indicating that there might be an optimal interval for R&D intensity. Based on the views, we propose the additional empirical hypothesis H 2-1 to observe the link between R&D decisions and a firm's financial performance.…”