Abstract
As technology innovation gains attention as a key value-relevant factor, many researchers raise questions about the conventional assumption that the market value of equity is a linear function of technology innovation. This study takes the view that R&D, as a proxy for technology innovation, helps promote firm value in ways dependent on firms’ characteristics and market structure. To explore this argument, this study collects data from small and medium companies listed on the Korean stock markets covering from 2001 to 2011. The results show that R&D contributes to the promotion of the market value of equity, which, as a proxy for firm value, is in turn found to be nonlinearly associated with R&D according to a firm’s characteristics and market structure. This paper indicates the need to employ a nonlinear value relevance model in assessing the market value of equity as a function of the R&D investments of small and medium Korean companies.
Highlights
Much of the accounting and finance literature has reported the positive value relevance of technology innovation
The coefficients of RND*D displays negative estimates at the 1 % level of significance in every model. This indicates that R&D is nonlinearly related to firm value as it relates to debt ratio and that the value relevance of R&D investment decreases as the increase of debt ratio
This study examines the nonlinear value relevance of R&D as a proxy for technology innovation in small and medium Korean companies over the period from 2001 to 2011
Summary
Much of the accounting and finance literature has reported the positive value relevance of technology innovation. In performing the piecewise linear regression, this paper divides its sample data into two or three pieces according to the size of assets, sales, net income, book value of equity, and R&D intensity in order to offer evidence about the changes of value relevance function in small and medium Korean companies. This result implies that R&D increases a firm’s value, that excessive R&D may decrease the market value of equity, and that reaching a certain level of assets, sales, net income, book value of equity, and intensity allows R&D to enhance its promotion of the market value of equity These results offer new insights into the value-relevance shape of technology innovation and shows that a new valuation model is necessary for the evaluation of small and medium Korean companies.
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