THE STOCK MARKETS VALUATION OF RESEARCH-AND-DEVELOPMENT SPENDING AND MARKET CONCENTRATION

This study investigates the stock market's valuation of the R&D expenditure plans of U.S. firms. A model that relates expenditures on innovative activity to the market value of the firm is set forth and tested for a sample of announcements that were made by firms that accounted for over 58% of company-funded R&D in the United States in 1984. The results, which are consistent with the predictions of the model, reveal significant differences in the abnormal returns for firms operating in different marketing environments. In particular, for firms in industries characterized by high (low) seller concentration, announcements of increases in planned R&D expenditures are associated with significant positive (negative) excess stock returns. This is also consistent with a Schumpeterian view on the relationship between market structure and innovation that predicts a differential market response to R&D that depends on the firm's market concentration. In addition, there is evidence that the market responds favorably to larger R&D spending increases, after accounting for differences in firms' knowledge capital bases. Finally, there is evidence that the rate of return to investment in R&D is quite high, in conformity with previous work.