The Conditional Value of R&D Investments

Companies' investments in research and development (R&D) are usually associated with better growth opportunities incorporated in the firms' market valuation. This study focuses on the question how does the firms' market value attributable to R&D investments depend on the firms' ability to employ intangible capital profitably. The results suggest that the R&D activities of firms with positive profits receive a higher market valuation than the R&D projects of firms with negative profits. Hence, investors appear to disregard the optimism of managers boosting R&D investments in the face of negative profits and prefer to focus on the risks associated with such investments. In general, this effect remains stable over time, but the investors' sensitivity to shifts in R&D investments and earnings changes over the business cycle.