Market valuation of Dot Com companies; R&D versus hype

Abstract

This article empirically examines whether the ratio of research and development (R&D)spending to sales and marketing spending has an impact on the valuation of Dot Com companies. These companies are currently trading in today’s stock market. Previous research has not been able to link the lofty market value of Dot Com companies to a distinguishable trait. Many theories have been proposed without empirical findings to support them. We find those Dot Com companies with higher ratios of R&D spending are more likely to have higher stock market values in the subsequent year than those with lower ratios. A sensitivity test shows that the results are qualitatively the same even after market correction of high‐tech stock.