Abstract/Details

The impact of research and development on the fundamentals and market values of firms


2007 2007

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Abstract (summary)

In the first essay, we survey the literature on R&D in both economics and finance. We see that in finance, the focus has been on the impact of R&D on market value, but without including any measure of R&D output, such as patent counts or citations, whereas in economics the focus has been on measuring R&D, but without a forward-looking stock portfolio perspective. We propose to expand on both areas, in the following fashion.

In the second essay, we investigate the impact of R&D on the fundamentals of the firm. This in itself is new, since most of the literature focuses on market values and uses firm fundamentals mostly as a way to subdivide the sample into high-growth/low-growth, high-tech/low-tech etc. We explore the relationship between R&D and growth (as represented by sales growth) and profitability (as represented by ROE).

Finally, in the third essay, we explore the impact of R&D activities on market values. The novel factor here relative to the financial literature is the inclusion of measures of R&D output. We include patent counts as a measure of R&D quantity and patent citations as a measure of R&D quality. Relative to the literature in economics, we add the forward-looking, portfolio-based abnormal performance view characteristic to the financial field. Economists use all the measures of R&D that we use, but do so in a snapshot-like, "hedonic" market value equation.

We find that R&D efforts tend to increase the sales growth of companies, but to decrease ROE, consistent with the observation that high-tech companies are typically growth companies (i.e. growth stocks) that forego current earnings for (hopefully much higher) future ones.

When used to form stock portfolios, the R&D spending and citations intensities are effective at discerning winners from losers. The top (bottom) quintile outperforms (underperforms) by about 5% per year both on a cumulative and risk-adjusted basis. Furthermore, in a Fama and French-style regression of returns versus size, B/M and R&D variables, the citations variable is significant, with one additional citation per patent contributing 0.4% to annual cumulative returns.

Indexing (details)


Subject
Management;
Essays;
Research & development--R&D;
Market value;
Sales;
Profitability;
Patents;
Return on equity;
Studies
Classification
0454: Management
Identifier / keyword
Social sciences; Firm fundamentals; Market value; Research and development
Title
The impact of research and development on the fundamentals and market values of firms
Author
Chichirau, Cosette P.
Number of pages
141
Publication year
2007
Degree date
2007
School code
0118
Source
DAI-A 68/07, Dissertation Abstracts International
Place of publication
Ann Arbor
Country of publication
United States
ISBN
9780549170662
Advisor
Branch, Ben S.
University/institution
University of Massachusetts Amherst
Department
Management
University location
United States -- Massachusetts
Degree
Ph.D.
Source type
Dissertations & Theses
Language
English
Document type
Dissertation/Thesis
Dissertation/thesis number
3275756
ProQuest document ID
304844953
Copyright
Database copyright ProQuest LLC; ProQuest does not claim copyright in the individual underlying works.
Document URL
http://search.proquest.com/docview/304844953
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