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Article: The valuation of corporate R&D expenditures: evidence from investment opportunities and free cash flow.
- Article from:
- Financial Management
- Article date:
- March 22, 1996
- Author:
CopyrightCOPYRIGHT 1996 Financial Management Association. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)
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Past research shows a significant market response to announced increases in R&D expenditures (Woolridge, 1988). However, the reaction depends on the firm's industry. The reaction is significantly positive for firms operating in high-technology industries but significantly negative for firms in low-technology industries (Chan, Martin, and Kensinger, 1990, and Zantout and Tsetsekos, 1994). This suggests the investment opportunities hypothesis that R&D investments by firms with promising growth opportunities are generally worthwhile, whereas other R&D investments may be wasteful.
We provide confirmatory evidence of this market reaction using a different measure of ...