R&D Intensity and Market Valuation of Firm: A Study of R&D Incurring Manufacturing Firms in India

This study examines the impact of R&D expenditure on market valuation of firm proxied by Tobin’s q using firm level data for manufacturing firms in India. To accomplish the research objective this study obtained data from Prowess database of Centere for Monitoring Indian Economy (CMIE) over the period of 2001-2010. The study forms an unbalanced panel comprising 2382 firm-year observations and employs Pooled-OLS and fixed effects models to analyze the relationship between R&D intensity and firm value as measured by Tobin’s q. The findings reflect an inverted U-shaped relationship between R&D intensity and firm value indicating the diminishing marginal return to each unit spent on R&D. The result implies that R&D investment have a positive impact on the market value of firm at the beginning, however, after a point these investments lower the market performance of firms.