Techniques and Perspectives for Multi-Level Analysis
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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