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How Do Firm Characteristics Influence the Relationship between R&D and Firm Value?
Author(s) -
Pindado Julio,
De Queiroz Valdoceu,
De La Torre Chabela
Publication year - 2010
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/j.1755-053x.2010.01091.x
Subject(s) - valuation (finance) , arbitrage , economics , cash flow , market value added , market value , monetary economics , enterprise value , capital intensity , r&d intensity , discounted cash flow , value (mathematics) , microeconomics , econometrics , financial economics , finance , profit (economics) , management , machine learning , computer science
This paper focuses on how a firm's characteristics affect the market valuation of its research and development (R&D) spending. We derive a valuation model based on the capital market arbitrage condition. Using the generalized method of moments and data from the Eurozone countries to estimate this model yields interesting results. Several firm characteristics (size, firm growth, and market share) positively affect the relationship between firm value and R&D spending, while others (free cash flow, dependence on external finance, labor intensity, and capital intensity) exert a negative effect. Therefore, we conclude that the effectiveness of R&D spending depends on firm characteristics .