Abstract
This paper utilized the real R & D option theory especial the Bellalah [1] information cost model as the discussion base for the exploration of R & D value. We extended Bellalah’s model as to add the factors of Poisson event and exponential decay to approximate the reality; we calculated the derivative value of R & D investment and relaxed the Generally Accepted Accounting Principles (GAAP) as to deem the accumulated R & D investment the capital owned by a firm and to evaluate it as well. The empirical results enlightened us: our modified model meet with reality better than the original model; the derivative R & D value have explanatory power to the equity behavior especial the risk magnitude proxied by β and lastly, to entirely expense the R & D investment could be problematic since R & D investment own the property of capital.
Highlights
Merton asserted the importance of information cost and documented that an investor shall demand higher stock return if higher information cost is expensed [2]
We extended Bellalah’s model as to add the factors of Poisson event and exponential decay to approximate the reality; we calculated the derivative value of R & D investment and relaxed the Generally Accepted Accounting Principles (GAAP) as to deem the accumulated R & D investment the capital owned by a firm and to evaluate it as well
The empirical results enlightened us: our modified model meet with reality better than the original model; the derivative R & D value have explanatory power to the equity behavior especial the risk magnitude proxied by β and lastly, to entirely expense the R & D investment could be problematic since R & D investment own the property of capital
Summary
Merton asserted the importance of information cost and documented that an investor shall demand higher stock return if higher information cost is expensed [2]. Following the context of Merton, Bellalah [1,3] incorporated the information cost factor in valuing both options and R & D. In Bellalah’s setting only the factors influencing R & D’s market value were considered. The truth is that R & D value will depreciate while time elapses; its value could be vanished overnight because of any unexpected evolution. These facts imply some other exogenous factors which influence the R & D’s payoff deserve to be comprehended. For the level of information cost, Bellalah stressed the hardness in defining it and proposed an alternative as to find proxies from derivates markets; though this idea was not taken eventually. We are going to observe the individual effect of information costs; we are going to actualize Bellalah’s proposal to see what the real level of information cost could be
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