Can R&D expenditures affect firm market value? An empirical analysis of a panel of European listed firms.

There are few comparative studies for Continental European countries such as Germany, France, Italy or Sweden, as a result of the opacity of information, the less developed financial markets and the limited number of listed firms. The theory of efficient financial markets, investors should correctly value tangible and intangible firm assets and these valuations should therefore be reflected in the market value of any company. This relation is of particular importance to researchers and has been studied using different approaches since the 80’s. Unfortunately, the contributions are strongly focused on US and UK firms due to the relevance and liquidity of the financial markets of these countries. The study, using two econometric specifications, examines different characteristics of companies such as operative income, market share, debt to equity ratio, firm size and sales. To control for the way firms account their R&D expenditure, the IAS accounting standard variable is used, namely, the total expensing of these costs in the year they were incurred instead of capitalizing them. We also control for specific country and industry effects. The results confirm the strong positive and significant influence of R&D expenditure on firm market value. We find the same effect when considering residual income. Nevertheless, the relevance of this effect differs among different countries. In addition, the evidence shows that younger and smaller firms that operate in hi-tech markets are able to spend more efficiently in research and development: the effect of R&D investment on firm market value in these types of companies is stronger compared to older and low-tech industry sectors. The robustness check, which considers different definitions of the dependent variable, reinforces the evidence that R&D expenditure has a significant and positive impact on the stock prices of European companies