Techniques and Perspectives for Multi-Level Analysis
5. 5.1 R&D information INTRODUCTION As shown in Chapter 4, the market valuation of R&D investments is a very important issue for managers, investors and researchers. Chapter 4 has presented the main methods and results of the literature linking R&D investments and firm market value, but it has not dealt with the possible R&D information problems arising between managers and outside investors. Indeed, despite the continuous growth of R&D spending, the information sources and level of disclosure on R&D have not significantly changed for the last two decades. Several studies have advanced that the relative scarcity of R&D disclosure and the inability of accounting rules to recognize fully the economic value of R&D investment may give rise to information deficiencies (among others, Lev, 2001; Hand and Lev, 2003). Accordingly, the main contribution of this chapter is to analyse how R&D information flows from firms to investors and the implications for firm market value. The uniqueness of R&D economic attributes makes it difficult for outsiders to learn about its value. Accounting rules exacerbate the information asymmetries, as R&D investments are in general fully expensed in financial reports or not even disclosed. This chapter will deal with three interrelated aspects related to the R&D information chain. First, it explains why and how R&D investments generate information asymmetries between insiders (managers) and outsiders (investors). Second, it analyses the value relevance of R&D information for investors and stock prices. Third,...
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