Abstract
The study investigates the value relevance of R&D investment and the reactions of investors in Korean stockmarkets over the period of 2001-2008. This paper examines whether R&D investment is associated with equityvalue and whether the information of R&D investment is truly reflected on the Korean stock markets. Consistentwith the hypothesis and prior researches, the empirical results of this paper documents that R&D investment issignificantly related to the market value of equity and Korean investors quickly recognize the implication ofR&D investment information.
Highlights
This paper examines whether R&D investment is associated with equity value and whether the information of R&D investment is truly reflected on the Korean stock markets
The paper examines the persistence of R&D investments and market reactions on it over the period of 2001-2008
This study investigates the persistence of R&D activity by testing whether current year R&D investment is significantly related to one year after accounting performance
Summary
Much of the previous literature on this topic has documented that R&D investment can promote productivity and create firm value (Griliches and Mairesse, 1984; Hirschey, 1982; Hirschey and Weygandt, 1985; Bublitz and Entredge, 1989; Chauvin and Hirschey, 1993; Sougiannis, 1994; Lev and Sougiannis, 1996; Hall, 1999). Fama (1970) tests the hypothesis that the capital market is so efficient that it can reflect all value relevant information on stock prices. According to Fama (1970), all financial market participants act so immediately on all value relevant information that the security prices truly reflect the expectations of investors. Other literature argues that R&D investment is the main reason for the underestimation or overestimation of stock prices in financial markets (Hall, 1993; Aboody and Lev, 2000; Eberhart, Maxwell, and Siddique, 2004; Luo, 2005). In the same context, Hall (1993) reports that a long time is required until R&D investment create future cash flows, because R&D has uncertainty, investors cannot expect whether the R&D project will succeed or not. Luo (2005) reports that because of information asymmetry, market participants are less knowledgeable about M&A between high-tech companies than other contracts
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