Research and development, profits, and firm value: A structural estimation | Zendy

Warusawitharana Missaka | Zendy

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Research and development, profits, and firm value: A structural estimation

Author(s) -

Warusawitharana Missaka

Publication year - 2015

Publication title -

quantitative economics

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 4.062

H-Index - 27

eISSN - 1759-7331

pISSN - 1759-7323

DOI - 10.3982/qe282

Subject(s) - profitability index , counterfactual thinking , economics , value (mathematics) , generalized method of moments , estimation , structural estimation , capital (architecture) , econometrics , distribution (mathematics) , capital intensity , microeconomics , industrial organization , monetary economics , panel data , finance , statistics , mathematics , profit (economics) , management , mathematical analysis , philosophy , archaeology , epistemology , history

This study presents a model in which firms invest in research and development (R&D) to generate innovations that increase their underlying profitability and invest in physical capital to produce output. Estimating the model using a method of moments approach reveals that R&D expenditures contribute significantly to profits and firm value. The model also captures variation in R&D intensity, profits, and firm value across R&D‐intensive industries. Counterfactual experiments suggest that changes in the distribution of firms in the economy may, over the long run, mitigate tax policy changes designed to encourage R&D expenditures.

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