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.
Earnings and Equity Valuation in the Biotech Industry: Theory and Evidence
Article first published online: 25 AUG 2008
© 2008 Financial Management Association International.
Volume 37, Issue 3, pages 431–460, Autumn 2008
How to Cite
Joos, P. and Zhdanov, A. (2008), Earnings and Equity Valuation in the Biotech Industry: Theory and Evidence. Financial Management, 37: 431–460. doi: 10.1111/j.1755-053X.2008.00020.x
- Issue published online: 25 AUG 2008
- Article first published online: 25 AUG 2008
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.