Financial market development and the effectiveness of R&D investment: Evidence from developed and emerging countries

Does financial market development enhance the effectiveness of R&D investment in an economy? To address this question, we apply three distinct approaches including (i) ordinary least square method, (ii) cross-country instrumental variable regression approach, and (iii) panel regression method. By using a dataset of both developed and emerging countries, we find that financial market development significantly contributes to the effectiveness of total R&D investment. This finding remains robust across different model specifications and individual estimation methods. Our finding provides an important guidance to policy makers in implementing a sound financial environment that can facilitate the total contribution of R&D investment.     

Penetrating the Book-to-Market Black Box: The R&D Effect

The book-to-market (BM) phenomenon – the positive association between BM and subsequent returns – looms large among capital market enigmas. Economic theory postulates that the difference between market and book values of companies reflects their future abnormal profits. We capture these abnormal profits for a large sample of science-based companies by estimating the value of the off-balance sheet investment generating those profits – the value of R&D capital – and show empirically: (i) Firms' R&D capital is associated with their subsequent stock returns. (ii) For R&D intensive firms, this 'R&D effect' subsumes the 'book-to-market effect.' (iii) The association between R&D and subsequent returns appears to result from an extra-market risk factor inherent in R&D, rather than from stock mispricing. We thus provide an explanation for the book-to-market phenomenon of R&D companies.     

Limits of tax regulation: Evidence from strategic R&D classification and the R&D tax credit

We investigate a tax avoidance strategy where firms use the ambiguity inherent in tax reporting to classify indirect costs as research and development (R&D) expenditures to take advantage of the R&D tax credit. We label this tax practice “strategic R&D classification”. We find a one standard deviation increase in strategic R&D classification leads, on average, to a 1.7% (1.5%) reduction in GAAP (cash) effective tax rates, suggesting this practice provides significant tax savings. However, we also find strategic R&D classification is related to both the level and changes in uncertain tax benefit liabilities required to be recognized under FIN 48, suggesting this practice comes with financial reporting costs. Our study contributes to the literature by documenting some of the costs and benefits associated with a previously unexplored tax strategy, and highlights the limitations faced by tax authorities in monitoring firms’ R&D tax credit.     

The effect of management incentives and cross-listing status on the accounting treatment of R&D spending

This paper investigates the effect of management incentives and cross-listing status on the accounting treatment of research and development (R&D) spending for a sample of Canadian hi-tech and biopharmaceutical firms. U.S. GAAP adopts an immediate expensing rule for all R&D spending except for software development costs for which technological feasibility has been established. Contrary to the U.S., Canadian and international standard setters recommend capitalization if development costs meet certain criteria. Because those criteria are largely based on management judgment, capitalization of R&D spending is an accounting choice that can be used for income manipulation or signaling.Using a logit model, we examine how the decision to capitalize R&D spending is influenced by the cross-listing status and several other key firm characteristics that are well documented in the accounting literature. We find that the probability of capitalizing R&D spending increases for cross-listed and non-cross-listed firms in the software industry. The probability of capitalizing R&D spending also increases for firms that are more leveraged, more mature, and have higher level of cash flows from operations. However, the probability of capitalizing R&D spending decreases for larger corporations, firms with more concentrated ownership and highly profitable firms. Overall our results indicate a preference for Canadian firms in the software industry to emulate U.S. accounting practices for R&D spending. They also suggest that firms use the decision to capitalize or expense R&D spending as an earning management tool to either meet debt covenants or to smooth income.     

Explaining the Short‐ and Long‐Term IPO Anomalies in the US by R&D

Abstract:   Financial scholars who research the initial underpricing and long‐term underperformance of IPOs generally attribute these phenomena to information asymmetry and investors' misevaluations. Here, we identify, on a sample of 2,696 US IPOs issued during 1980–1995, a widespread source of information asymmetry and valuation uncertainty—the R&D activities of issuers—and document that these activities significantly affect both the initial underpricing of IPOs (R&D is positively correlated with underpricing) and their long‐term performance (R&D is positively related to long‐term performance). Given the pervasiveness and constant growth of firms' R&D activities in modern economies, our identification of R&D as a major factor affecting IPO's performance contributes to the understanding of this important economic and capital market phenomenon.     

Mispricing and risk of R&D investment in European firms

We study whether R&D-intensive firms earn superior stock returns compared to matched size and book-to-market portfolios across several financial markets in Europe. Mispricing can arise if investors are not able to correctly estimate the long-term benefits of R&D investment or whether R&D firms are more risky than others. The results confirm that more innovative firms can earn future excess returns. Stocks listed on continental Europe markets and operating in high-tech sectors are more prone to undervaluation. This can be caused in the first case by information asymmetries that are more severe in bank-based countries. No evidence is found for a different risk pattern of R&D-intensive stocks.     

R&D Efforts,Total Factor Productivity,and the Energy Intensity in China

ABSTRACT

This paper first measures the levels and growths of regional TFP in China using a panel dataset of China’s 30 provinces from 1978–2014. It then estimates the effects of R&D on regional TFP and its growth further explores the impact of TFP on China’s energy intensity. We find no evidence that R&D has innovation and spillover effects on TFP and its growth in China’s provinces. Nevertheless, R&D can promote growth in regional TFP by helping to absorb new technologies embodied in FDI and foreign trade. The results indicate that TFP plays a significant role in the decline of China’s energy intensity.     

The Relation Among Targets' R&D Activities, Acquirers' Returns, and In-Process R&D in the US

Abstract:  Using a sample of 129 mergers and acquisitions (M&As) in the US between publicly traded acquirers and targets in research and development (R&D) intensive industries over the period of 1994-2004 and a size- and industry-matched sample, we examine the relation among targets' R&D activities, the probability of acquirers' writing-off in-process R&D (IPRD), and acquirers' returns around the time of M&A announcements. We find that firms acquiring targets with higher R&D investments tend to write off some of the acquired R&D assets upon the completion of the M&As. We also find that the median cumulative abnormal return during the three days around M&A announcements for acquirers with subsequent IPRD write-offs is −2.73% while the return for acquirers without IPRD write-offs is −0.60%. This suggests that acquirers' stock returns around M&A announcements are much lower when investors expect acquirers to expense IPRD. The results are consistent with our conjecture that acquirers tend to write-off IPRD when they acquire overvalued targets. We also find that IPRD write-offs do not increase earnings or stock returns of acquirers after M&As, which is inconsistent with an earnings management hypothesis.     

并购对企业R&D投资的挤出效应研究——基于并购前后资产负债率变动的视角

创新是企业内涵式的增长方式,并购是企业外延式的增长方式。在资源有限的情况下,企业如何在这两种战略之间进行权衡?本文以2007-2018年沪深A股上市公司为研究样本,发现如果并购引起企业资产负债率增加,则会对并购后的R&D投资形成"财务侵占",从而对研发产生负面影响;这种抑制作用在主并企业存在融资约束的情况下会更加显著;按企业特征划分,这种抑制作用主要存在于小企业和民营企业。研究结果为基于边界条件的并购如何影响企业创新绩效提供了实证证据,同时也为企业进行相关战略变更和投资决策提供了有益参考。     

Corporate Governance and Its Impact on R&D Investment in Emerging Markets

Corporate R&D activities are inherently risky but also difficult to monitor. Against this background, we examine the impact of ownership concentration and legal shareholder rights protection on corporate R&D investments in emerging markets. Based on a comprehensive sample of publicly listed firms from 24 countries, we find that R&D intensity is lower in firms with (strategic) block ownership, and this effect is more pronounced in countries with stronger shareholder rights protection. This suggests that, similar to the situation in developed economies, dispersed ownership, which allows shareholders to diversify their investment risks, is beneficial for corporate R&D and that this effect is intensified by more developed institutions.     

Foreign competition for shares and the pricing of information asymmetry: Evidence from equity market liberalization

Using the equity market liberalization of 23 emerging market countries between 1996 and 2006, we examine how the degree of competition for a firm's shares affects the price of information asymmetry. We find evidence of a significant decline in the pricing of information asymmetry as countries remove regulatory restrictions on foreign ownership. Our study provides novel evidence on the link between the degree of competitiveness of equity markets and the price of information asymmetry. The work also furthers our understanding of the economic consequences of foreign stock ownership.     

The value-relevance of R&D and advertising expenditures: Evidence from Korea

This study examines the value-relevance of R&D and advertising expenditures of Korean firms, using a regression model based on the Ohlson [Contemp. Account. Res. (1995) 661] equity-valuation framework. Results indicate that R&D expenditures are positively associated with stock price, suggesting that capitalizing R&D expenditures is appropriate. The association is stronger for the portion of R&D expenditures that is capitalized, rather than expensed, suggesting that investors agree with management that the capitalized expenditures represent greater future economic benefits. Investors also appear to interpret fully expensed R&D expenditures as positive net present-value investments, however, suggesting that these expenditure should also be capitalized. Additional results indicate that advertising expenditures are negatively associated with stock price, and the magnitude of this negative association is similar to the association between other expenses and stock price. These findings suggest that investors believe the economic benefits of advertising expenditures expire in the current period, similar to other expenses.     

The Effects of Private Investments in Public Equity on R&D Investment in Small and Medium-Size Enterprises

This paper provides evidence that small and medium-size enterprises (SMEs) use a portion of private investments in public equity (PIPEs) for current research and development (R&D) investment, hold the rest in liquidity reserves such as cash assets and working capital, and ultimately use these reserves to smooth R&D investment. That is, PIPEs may have a direct effect on R&D investment and an indirect or smoothing effect using liquidity reserves. This paper also shows that innovative SMEs such as venture businesses, inno-biz firms, and management innovative firms are more likely to use PIPEs for R&D investment than are noninnovative SMEs. The implications of this paper are that PIPEs can be used as an important source of external financing to fund R&D investment and can be particularly valuable for R&D investment in innovative SMEs.     

The Effect of Managerial Incentives to Bear Risk on Corporate Capital Structure and R&D Investment

In this study we use estimates of the sensitivities of managers' portfolios to stock return volatility and stock price to directly test the relationship between managerial incentives to bear risk and two important corporate decisions. We find that as the sensitivity of managers' stock option portfolios to stock return volatility increases firms tend to choose higher debt ratios and make higher levels of R&D investment. These results are even stronger in a subsample of firms with relatively low outside monitoring. For these firms, managerial incentives to bear risk play a particularly pivotal role in determining leverage and R&D investment.     

Financial factors in R&D budget setting: the impact of interfunctional market coordination, strategic alliances, and the nature of competition

Increasingly demanding markets, changes in technology and greater international competition have made the effective management of product R&D together with its associated costs essential. The magnitude of R&D costs are of concern to many companies, potentially inhibiting organizations from investing in new product development. Although rising costs of R&D and the growing dependence of companies on R&D for product leadership increase the need to plan and evaluate R&D activities more effectively, difficulties have been experienced in applying budgetary control systems to R&D. Despite such concerns, the published literature indicates that an emphasis on financial factors in setting the size of R&D budgets is becoming a competitive necessity. A review of the published literature suggests that interfunctional market coordination, the relative use of strategic alliances and the nature of competition in terms of product cost versus product innovation are potentially instrumental in influencing the degree of emphasis on financial factors in R&D budget setting. The results of the present study indicate that these three organizational and environmental variables result in an emphasis on financial factors in setting the size of R&D budgets. Implications drawn from the findings are discussed.     

Explaining dividend gap between R&D and non-R&D Indian companies in the post-reform period

Short-termism or market myopia hypothesis, which posits a negative trade-off between dividend payments and research and development (R&D) investments of corporate firms, forms the basis of our paper. Factors influencing the dividend gap between R&D and non-R&D companies in India are explored and a semi-parametric decomposition (developed by Dinardo, Fortin and Lemieux (DFL, 1996)) conducted on cross-section data of listed companies for the years 2001 and 2010 to investigate the issue. The results reveal that profitability and market to book ratio are the factors which have played some roles to reduce the dividend gap in 2001. However, in 2010, all the characteristics have some role to play. In other words, if the R& D companies enjoyed characteristics similar to the non-R&D ones, then dividend gap between the two groups would have been less. However, the results are found to be sensitive to the ordering of the variables in the weighting function. Refuting the short-termism theory, our findings corroborate that decisions regarding dividend payments and investment in R&D are made simultaneously, which is in agreement with the simultaneous dividend theory.     

The Differential Impact of IFRS Adoption on Aspects of Seasoned Equity Offerings in the UK and France

We examine the potential for IFRS to influence the market for SEOs in the UK and France. The divergence between the UK domestic accounting standards and IFRS is minor (low-divergence firms) whereas domestic accounting standards in France differ materially from IFRS (high-divergence firms); however, both countries have similar legal enforcement and institutional settings that might confound the effect of IFRS adoption. We argue that IFRS adoption serves to mitigate information asymmetry and improve accounting quality. Accordingly, we find that, following IFRS adoption, earnings management activities decrease among high-divergence firms prior to issuing SEOs. As a result of the lower levels of earnings management and information asymmetry, we predict and find that the market reaction to issuing SEOs improves significantly for high-divergence firms following IFRS. Given that equity financing becomes less costly, we find that the propensity to issue new SEOs increases among high-divergence firms after IFRS adoption. We find no similar changes among low-divergence firms. The results persist after running a matched-sample analysis and controlling for potential self-selection bias.     

Reliability of R&D capitalization: Evidence from ex post impairment in China

Unlike prior studies that investigate research and development (R&D) accounting as a dichotomous choice between capitalizing vs. expensing, this study identifies low-reliability R&D capitalization by the occurrence of ex post impairment of capitalized R&D costs. I find that low-reliability capitalization is associated with higher discretionary accruals but fails to signal future innovation, whereas normal capitalization without subsequent impairment lacks earnings aggressiveness and predicts future innovation positively, compared to expensing firms. Next, this study shows that Big 4 and industry specialist auditors improve reliability by notably decreasing the likelihood of low-reliability R&D capitalization. The results remain robust after controlling for R&D investment intensity and potential endogeneity in the capitalization decision. Additional tests show that managers strategically time the recognition of impairment for big-bath and earnings-smoothing purposes, and that analyst coverage does not help differentiate between low-reliability and normal R&D capitalization. Collectively, this paper increases our understanding of R&D accounting and auditing and contributes to the debate on the reliability of R&D capitalization.     

Market Valuation of Successful versus Non‐successful R&D Efforts in the Pharmaceutical Industry

Abstract:   This paper examines the relationship between a non‐financial measure of successful research and development (R&D) efforts in the pharmaceutical industry and R&D expenditures. I hypothesize that the R&D of successful producers will be valued more by the market than the R&D of non‐successful producers. The regression results support the hypothesis. In the primary model, R&D is not associated with price; however, the coefficient on the interaction between R&D and successful developers is positively related to stock price. This implies that the market values the R&D expenditures of successful developers but not the expenditures of less‐successful developers.     

Stock Market Valuation, Profitability and R&D Spending of the Firm: The Effect of Technology Mergers and Acquisitions

Abstract:  In this paper, we investigate whether a firm can enhance the effect of its R&D spending on its current market value and future profitability through technology-oriented M&As. On the basis of an analysis of 1,879 M&As, we find that when a technology firm acquires another technology firm, the magnitude of the stock price response to the R&D spending of an acquirer increases by 107% in the year of the M&A. In contrast, we find no such increase in the stock price response to the R&D spending of a non-technology acquirer. We also find that technology acquirers are more successful in converting their R&D spending into positive future profitability than non-technology acquirers. Our results are robust for different alternative specifications of our model and when various firm differences are controlled for.