THE ABSENCE OF THE BOOK‐TO‐MARKET EFFECT IN THE TAIWAN STOCK MARKET: A DECOMPOSITION APPROACH

This paper examines the absence of the book‐to‐market equity (BM) effect in the Taiwan stock market, applying the BM decomposition proposed by Daniel and Titman (2006 ). First, we do not observe a significantly negative correlation between future stock return and intangible return on research‐and‐development‐intensive firms in Taiwan, which is inconsistent with the US evidence documented by Daniel and Titman. Second, undervaluation of research‐and‐development‐intensive firms possibly leads to the absence of the BM effect. Those firms, most of which have low BM, perform well not only in the past, but also in the future, thereby obscuring the BM effect.     

STOCK MARKET VALUATIONS OF R&D AND ELECTRONICS FIRMS DURING TAIWAN'S RECENT ECONOMIC TRANSITION

The objective of the present study is to investigate the market valuation of Research and Development (R&D) investments in the Taiwanese stock market from July 1988 to June 2002. The motivation stems from Taiwan's recent economic transition from a labor‐intensive, then to a capital‐intensive, and currently to a technology‐based economy. The results support not only the existence, but also the persistence of R&D‐associated mispricing. More importantly, it has become stronger as the electronics industry gradually dominates the economy. First, R&D‐intensive stocks tend to outperform stocks with little or no R&D. Second, the R&D‐intensity effect cannot fully be attributed to firm size. Third, the R&D‐intensity effect is more pronounced for firms in the electronics industry after 1996.