Analyseinstitut for Forskning

This paper examines how stock prices are affected by research and development activities for Danish firms for the period, 1989 to 2002. Both through analysis of portfolios and regression analysis, the role of R&D assets is considered along with a number of other fundamental factors, such as size, the book to market ratio, leverage and the CAPM beta. There is at best a weak indication that R&D intensity has an effect on stock returns on its own – average returns for R&D intensive firms are slightly higher than those with no R&D. However, R&D intensity seems to have strong effects on stock market returns when controlling for other factors. For example, among firms with high book to market ratios (a possible sign of under pricing), R&D intensive firms tend to generate higher future returns. And while some indications of risk compensation are found for other factors, such as leverage, these are not found for R&D effects. In addition, the ratio of R&D assets to market value is explored as a potential financial indicator of undervaluation for R&D intensive firms. Comments from Ebbe Graversen, Michael Mark and seminar participants at the Danish Institute for Studies in Research and Research Policy are gratefully acknowledged. Address: The Danish Institute for Studies in Research and Research Policy, Finlandsgade 4, DK-8200 Aarhus N., Tel.: (45) 8942 2398, Fax: (45) 8942 2399, Email: [email protected]