The Stock Market Valuation of Research and Development Expenditures


  • Louis K. C. Chan,

  • Josef Lakonishok,

  • Theodore Sougiannis

  • * Chan is from the University of Illinois at Urbana-Champaign, Lakonishok is from the University of Illinois at Urbana-Champaign and NBER, and Sougiannis is from the University of Illinois at Urbana-Champaign and the Athens Laboratory of Business Administration (ALBA). We thank Kent Daniel, Werner DeBondt, Baruch Lev, Elizabeth Oltheten, Andrei Shleifer, René Stulz, Ian Tonks, an anonymous referee, and participants in seminars at the American Accounting Association 1999 meetings, American Finance Association 2000 meetings, Cornell University, European Finance Association 1999 meetings, European Financial Management Association 2000 meetings, Indiana University, INSEAD, London Business School, the London School of Economics Financial Markets Group Conference on the Valuation of Technology Stocks, Michigan State University, Ohio State University, University of Florida, University of Illinois, University of Michigan, the NBER Behavioral Finance-Asset Pricing Fall 1998 meetings for comments, and Konan Chan for research assistance.


We examine whether stock prices fully value firms' intangible assets, specifically research and development (R&D). Under current U.S. accounting standards, financial statements do not report intangible assets and R&D spending is expensed. Nonetheless, the average historical stock returns of firms doing R&D matches the returns of firms without R&D. However, the market is apparently too pessimistic about beaten-down R&D-intensive technology stocks' prospects. Companies with high R&D to equity market value (which tend to have poor past returns) earn large excess returns. A similar relation exists between advertising and stock returns. R&D intensity is positively associated with return volatility.