Off-campus UMass Amherst users: To download dissertations, please use the following link to log into our proxy server with your UMass Amherst user name and password.

Non-UMass Amherst users, please click the view more button below to purchase a copy of this dissertation from Proquest.

(Some titles may also be available free of charge in our Open Access Dissertation Collection, so please check there first.)

The impact of research and development on the fundamentals and market values of firms

Cosette P Chichirau, University of Massachusetts Amherst

Abstract

In the first essay, we survey the literature on R&D in both economics and finance. We see that in finance, the focus has been on the impact of R&D on market value, but without including any measure of R&D output, such as patent counts or citations, whereas in economics the focus has been on measuring R&D, but without a forward-looking stock portfolio perspective. We propose to expand on both areas, in the following fashion. In the second essay, we investigate the impact of R&D on the fundamentals of the firm. This in itself is new, since most of the literature focuses on market values and uses firm fundamentals mostly as a way to subdivide the sample into high-growth/low-growth, high-tech/low-tech etc. We explore the relationship between R&D and growth (as represented by sales growth) and profitability (as represented by ROE). Finally, in the third essay, we explore the impact of R&D activities on market values. The novel factor here relative to the financial literature is the inclusion of measures of R&D output. We include patent counts as a measure of R&D quantity and patent citations as a measure of R&D quality. Relative to the literature in economics, we add the forward-looking, portfolio-based abnormal performance view characteristic to the financial field. Economists use all the measures of R&D that we use, but do so in a snapshot-like, "hedonic" market value equation. We find that R&D efforts tend to increase the sales growth of companies, but to decrease ROE, consistent with the observation that high-tech companies are typically growth companies (i.e. growth stocks) that forego current earnings for (hopefully much higher) future ones. When used to form stock portfolios, the R&D spending and citations intensities are effective at discerning winners from losers. The top (bottom) quintile outperforms (underperforms) by about 5% per year both on a cumulative and risk-adjusted basis. Furthermore, in a Fama and French-style regression of returns versus size, B/M and R&D variables, the citations variable is significant, with one additional citation per patent contributing 0.4% to annual cumulative returns.

Subject Area

Management

Recommended Citation

Chichirau, Cosette P, "The impact of research and development on the fundamentals and market values of firms" (2007). Doctoral Dissertations Available from Proquest. AAI3275756.
https://scholarworks.umass.edu/dissertations/AAI3275756

Share

COinS