R&D Intensity and the Value of Analysts’ Recommendations*

Abstract

This study examines the relationship between the value of financial analysts’ recommendations and the intensity of firms’ research and development (R&D) expenditures. We conduct univariate, portfolio and regression analyses using a sample of 8,620 public firms for the period 1993-2004. The empirical results reveal that the value of analysts’ recommendations is significantly greater for firms that are more heavily invested in R&D. In addition, we investigate factors that contribute to the value of analysts’ recommendations. We find that analysts with advanced degrees (e.g., Ph.D., M.D.), more firm-specific experience and greater industry expertise issue more valuable recommendations particularly for R&D-intensive firms. Our findings shed light on the important issue of how informed market participants’ activities expedite the price discovery process of R&D firms. Prior research (Lev and Sougiannis 1996) shows that, despite the absence of mandatory financial reporting on R&D, investors incorporate information on the value and productivity of R&D investments into share prices. Our study suggests that analyst recommendations serve as an important channel through which information on the value and productivity of R&D projects becomes impounded into security prices.