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How Do Firm Characteristics Influence the Relationship between R&D and Firm Value?


  • The authors are grateful to Pablo de Andres, Gary Emery, David Hillier, Juha-Pekka Kallunki, Kevin Keasy, Partha Mohanram, Eva Ropero, the editor (Bill Christie), and anonymous referees for their helpful comments. We also appreciate comments from seminar participants at the 2007 Financial Management Association International Conference (Orlando) and the 2007 European Financial Management Association Conference (Vienna). We are grateful to the research agency of the Spanish Government, DGI (Project SEJ2007-65789) and the Regional Government of Castilla y Leon (Project SA069A08) for financial support. Pindado and de la Torre acknowledge the financial support from the Education Ministry at the Regional Government of Castilla y Leon (grant GR144). All errors are our responsibility.


This paper focuses on how a firm's characteristics affect the market valuation of its research and development (R&D) spending. We derive a valuation model based on the capital market arbitrage condition. Using the generalized method of moments and data from the Eurozone countries to estimate this model yields interesting results. Several firm characteristics (size, firm growth, and market share) positively affect the relationship between firm value and R&D spending, while others (free cash flow, dependence on external finance, labor intensity, and capital intensity) exert a negative effect. Therefore, we conclude that the effectiveness of R&D spending depends on firm characteristics.