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Conference Paper: Market valuation of decreases in R&D expenditures

TitleMarket valuation of decreases in R&D expenditures
Authors
Issue Date2010
Citation
The 2010 China International Conference in Finance (CICF 2010), Beijing, China, 4-7 July 2010. How to Cite?
AbstractWhile many studies report that R&D investments significantly contribute to firm value, little existing research investigates the effect of the reduction in R&D expenditures on firm value. This paper examines the long-term performance following significant R&D decreases. We find that, contrary to conventional wisdom, R&D decreases enhance rather than destroy shareholder value. We explore three potential economic motives behind R&D decreases -- R&D spillover, managerial myopia, and overinvestment. We find no compelling evidence to support either the spillover or myopia explanation. However, our results suggest that operating performance deteriorates immediately preceding R&D decreases and firms with low or decreasing investment opportunities outperform; these findings strongly support the overinvestment hypothesis. We also show that the cost of capital declines after R&D decreases. However, the market seems to underestimate the improvement in cost of capital following R&D reductions.
Persistent Identifierhttp://hdl.handle.net/10722/132221

 

DC FieldValueLanguage
dc.contributor.authorChan, Ken_US
dc.contributor.authorLin, Yen_US
dc.contributor.authorWang, Yen_US
dc.date.accessioned2011-03-21T09:02:37Z-
dc.date.available2011-03-21T09:02:37Z-
dc.date.issued2010en_US
dc.identifier.citationThe 2010 China International Conference in Finance (CICF 2010), Beijing, China, 4-7 July 2010.en_US
dc.identifier.urihttp://hdl.handle.net/10722/132221-
dc.description.abstractWhile many studies report that R&D investments significantly contribute to firm value, little existing research investigates the effect of the reduction in R&D expenditures on firm value. This paper examines the long-term performance following significant R&D decreases. We find that, contrary to conventional wisdom, R&D decreases enhance rather than destroy shareholder value. We explore three potential economic motives behind R&D decreases -- R&D spillover, managerial myopia, and overinvestment. We find no compelling evidence to support either the spillover or myopia explanation. However, our results suggest that operating performance deteriorates immediately preceding R&D decreases and firms with low or decreasing investment opportunities outperform; these findings strongly support the overinvestment hypothesis. We also show that the cost of capital declines after R&D decreases. However, the market seems to underestimate the improvement in cost of capital following R&D reductions.-
dc.languageengen_US
dc.relation.ispartofChina International Conference In Financeen_US
dc.rightsCreative Commons: Attribution 3.0 Hong Kong License-
dc.titleMarket valuation of decreases in R&D expendituresen_US
dc.typeConference_Paperen_US
dc.identifier.emailChan, K: konan@business.hku.hken_US
dc.identifier.authorityChan, K=rp01047en_US
dc.description.naturepostprint-
dc.identifier.hkuros177260en_US
dc.description.otherThe 2010 China International Conference in Finance (CICF 2010), Beijing, China, 4-7 July 2010.-

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