The effect of R&D investments on the market value:evidence from the Nordic countries

• Main Author: Zambrano Monserrate, A. (Andrea)
• Format: Dissertation
• Language: English
• Published: University of Oulu 2015
• Subjects: Accounting
• Online Access: http://urn.fi/URN:NBN:fi:oulu-201510152077; http://nbn-resolving.de/urn:nbn:fi:oulu-201510152077

The purpose of this thesis is to investigate the role that R&D expenditures have on the current stock market valuation of publicly listed firms from Denmark, Finland, Norway and Sweden. There is plenty of accounting literature that has investigated before the effect of R&D on the market value of firms. However, few studies have included the Nordic countries despite the fact that for highly developed countries, such as the Nordic region, R&D plays a crucial role to boost their economic growth. Therefore, the first aim of this thesis was to fill this gap by combining previously proposed econometric models and adapting a suitable model for the Nordic region to estimate the effect of R&D on the market value of firms. This thesis was divided in two parts; a theoretical and an empirical part. In the theoretical part, the most relevant accounting literature that analyzes the relation between R&D and the market value is presented and analyzed. As a result, two types of variables are identified: endogenous and exogenous factors. In the first category, firm-specific and industry-specific factors are pinpointed. The first ones are selected as control variables (size and earnings) and the second distinction is used to test the second hypothesis in the empirical part. Regarding the exogenous factors, the GDP of the studied countries is used as a control variable and the 2008 financial crisis is studied in the third hypothesis in the context of R&D. In the empirical part, the effect of R&D is analyzed from three perspectives with an OLS methodology. For this purpose, firm-level observations for the period of 1990‒2012 are taken from Thomson Reuters and combined with data from the World bank database. From this data, three hypothesis are developed and tested. First, a general model investigates the overall impact of R&D on the market value. Secondly, an interaction term is included to test whether or not the stock market valuation of R&D is stronger for technology-oriented companies. Finally, the impact of R&D on the market value in the context of the 2008 financial crisis is analyzed by estimating whether or not the R&D effect on the market value was stronger before the financial crisis. For this, an interaction term of R&D and a dummy variable that differentiates the periods before and after the financial crisis is included. In line with previous literature, the results show that the overall effect of R&D on the market value is positive and significant. On the other hand, looking from the industry context, R&D does not play a meaningful role on the market valuation of non-technology firms. This is in line with previous findings, where R&D is found to be significant at explaining the current market value only for firms that are R&D intensive. Finally, regarding the third hypothesis, the effect of R&D on the market value remains, in general terms, unchanged even after the 2008 financial crisis. This means that investors and companies have not “panicked” to the crisis. To the contrary, they are well aware of the importance and long-term benefits that R&D investments bring to their economies, especially in dealing with a financial crisis. Perhaps, this behavior could be coming from experience, as they are not foreigners to a financial crisis.