Evaluation and Performance Measurement of Research and Development

Evaluation and Performance Measurement of Research and Development

Techniques and Perspectives for Multi-Level Analysis

Vittorio Chiesa and Federico Frattini

This book develops and illustrates a comprehensive, multi-level framework for the evaluation of industrial R & D activities and the measurement of their performances. The framework encompasses a set of hierarchical, interrelated levels at which R & D evaluation and performance measurement could be undertaken. This enlightening book focuses on the single industrial firm to study performance measurement of R & D functions, projects and individual researchers or engineers. It also addresses the R & D evaluation from the point of view of financial markets, with a focus on the relationships between R & D investments and the value of the traded firm.

Chapter 4: R & D and Financial Investors

A. Grandi, B.H. Hall and R. Oriani

Subjects: business and management, organisational innovation, economics and finance, industrial organisation, innovation and technology, organisational innovation, technology and ict

Extract

4. 4.1 R&D and financial investors INTRODUCTION This chapter aims to analyse the valuation of R&D investments at the firm level, taking the perspective of the investors operating in the financial markets. It will deal, in particular, with the relationship between R&D investments and the market value of traded firms, explaining why and how R&D investments should be reflected in financial investors’ valuations and stock market prices. It is well known in the business and economics literature, as well as in professional accounting practice, that R&D investments affect firm performance, expected profits, and cash flows. Since in efficient financial markets investors evaluate a firm based on its expected cash flows (that is, a firm’s market value should be equal to the present value of all the expected cash flows produced in the future), R&D investments should also be reflected in market values. Moreover, stock prices should embed all the information currently available on the firm’s R&D investments and should react to any new information about those investments (see Figure 4.1). Under these conditions, stock markets can provide useful information on the value and the expected performance of R&D investments. In particular, because the returns to R&D investments may be spread over a number of years, a forward-looking and market-based measure, such as stock price, which includes in principle all the expected effects of R&D investments over the firm’s entire life cycle, may be more suitable than short-term accounting indicators such...

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