Earnings and Equity Valuation in the Biotech Industry: Theory and Evidence


  • Philip Joos,

    1. Philip Joos is a Professor of Accounting at Tilburg University in Tilburg, and a fellow of TiasNimbas Business School, the Netherlands.
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  • Alexei Zhdanov

    1. Alexei Zhdanov is an Assistant Professor of Finance at University of Lausanne and the Swiss Finance Institute in Lausanne, Switzerland, and is also an Assistant Professor of Finance at George Mason University in Fairfax, VA.
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  • We thank Mary Barth, Sudipta Basu, Bill Beaver, Dan Bens, Sandra Betton, Stan Markov, Sanjog Misra, K. Ramesh, Peter Reiss, Paul Zarowin, and especially the anonymous referee for their helpful comments.


We examine how the price-earnings relation varies with the uncertainty about and the quality of a firm's investments. We develop a real option valuation framework to capture investment and abandonment options in the research-intensive biotechnology industry. We hypothesize that the price-earnings relation will be V-shaped and change over the firm's life cycle. We also show how nonfinancial information affects the pricing of earnings. Our empirical findings are based on a sample of 301 biotechnology firms that made IPOs between 1980 and 2000, and are generally consistent with our predictions.