Home  Journals  Financial Analytics: Science and Experience  33(219) - 2014 September

Research and development expenditures, stock returns and sales growth of biopharmaceutical firms

Available online: 30 August 2014

Subject Heading: Investment policy

JEL Classification: 

Pages: 39-52

The study examines the relationship between research and development expenditures, stock prices and sales growth of biopharmaceutical firms. According to the accounting principles generally accepted in the USA, intangible assets are out the balance sheets and firms report research and development expenditures as expenses. In order to demonstrate that this kind of expenditures can be adopted as intangible assets, the standard analysis methods (portfolio and cross-section) and calculations (price- and equally-weighted) have been used. A sample includes 72 biopharmaceutical firms traded in the USA with available accounting data over the period from 2002 to 2012. The firms are sorted on the basis of research and development spending intensity. Both high and low intensive firms have been considered as potential investment targets. Equally-weighted calculations of stock returns and sales growth of biopharmaceutical firms with high intensity of research and development spending find some reasons for buying their stocks while price-weighted ones contradict this suggestion mostly. In addition, the following findings have been made: the research and development intensity level can be used as a selection criterion; the selection criterion based on this intensity level generally underperform traditional selection criteria; sales growth is not always incorporated into stock prices; the ratios research and development to the market and enterprise values are more appropriate for measuring of intensity compared to research and development to sales ratio.

Keywords: research and development expenditures, stock return, sales growth, intangible assets, equity valuation, portfolio selection

References:

1. Chambers D., Jennings R., Thompson R. Excess Returns to R&D-Intensive Firms. Review of Accounting Studies, 2002, no. 7, pp. 133–158.
2. Chan L., Hamao Ya., Lakonishok J. Fundamentals and Stock Returns in Japan. Journal of Finance, 1991, no. 46, pp. 1739–1764.
3. Chan L., Lakonishok J., Sougiannis T. The Stock Market Valuation of Research and Development Expenditures. Journal of Finance, 2001, no. 56, pp. 2431–2456.
4. Eberhart A., Maxwell W. & Siddique A. An Examination of Long-Term Abnormal Stock Returns and Operating Performance Following R&D Increase. Journal of Finance, 2004, no. 59, pp. 623–650.
5. Fama E., French K. The Cross-Section of Expected Returns. Journal of Finance, 1992, no. 47, pp. 427–466.
6. Fama E., French K. Dissecting Anomalies. Journal of Finance, 2008, no. 63, pp. 1653–1678.
7. Lev B., Sougiannis T. The Capitalization, Amortization and Value-Relevance of R&D. Journal of Accounting and Economics, 1996, no. 21, pp. 107–138.
8. Lev B., Sarath B., Sougiannis T. R&D Reporting Biases and Their Consequences. Contemporary Accounting Research, 2005, no. 22, pp. 977–1026.
9. Liu Q. Growth Opportunities, Knowledge Capital and Leverage: Evidence from U.S. Biotech Firms. University of Hong Kong. Working Paper, 2000.
10. Penman S., Zhang, X. Accounting Conservatism, the Quality of Earnings and Stock Returns. Accounting Review, 2002, no. 77, pp. 237–264.
11. Williams D., Pouder R. R&D Spending and Sources of Funding of Private US Biopharmaceutical Firms Seeking to go Public. Journal of Commercial Biotechnology, 2010, no. 16, pp. 284–292.

View all articles of issue

ISSN 2311-8768 (Online)
ISSN 2073-4484 (Print)

Journal current issue

Vol. 17, Iss. 1 March 2024

Archive