Stock market valuation of R&D expenditures—The role of corporate governance☆

Article history: Received 20 September 2013 Accepted 23 December 2014 Available online 27 December 2014 This paper examines whether firms with greater research and development (R&D) expenditures earn higher stock returns when they have good corporate governance. After controlling for size, book-to-market ratio, momentum, asset growth, accruals, and abnormal capital expenditures, we determine that R&D-intensive firms indeed earn higher stock returns when they have well-established corporate governance. Our results are robust to a variety of industry fixed-effect controls, governance proxies, model specifications, and panel regression with standard errors adjusted for year clustering. Therefore, our results are not endogenously driven by inherent characteristics. These results suggest that good governance is able to prevent potential overinvestment in R&D spending, thereby increasing the rate of return for R&D spending firms. © 2014 Elsevier B.V. All rights reserved. JEL classification: G10 G.11