|Author:||Pun, Po-ping Betty|
|Title:||A valuation model of research and development investments and expenditures|
|Subject:||Hong Kong Polytechnic University -- Dissertations.|
Investments -- Valuation.
|Department:||Graduate School of Business|
|Pages:||270 leaves : col. ill. ; 30 cm.|
|Abstract:||I examine whether the mispricing for Research and Development intensive firms is caused by conservative accounting or the inability of the current market model to properly reflect investors' expectations of the value of R&D firms. 1 expand the Feltham and Ohlson 1996 model by including R&D expenditures in the system dynamics to infer "other" information about the random changes in future persistence of net revenue generated by past investments and the random changes in future growth in positive-NPV investment opportunities. Thus, the proposed model formally incorporates the roles of R&D investment in the determination of the firm's future cash receipts, cash investments and next period R&D expenditures. The risks for R&D investments can also be captured explicitly and hence the estimated value is expected to reflect the intrinsic value of the firm. The results show that the estimated value better explains the market price than book value. In addition, the proposed model is a more proper model to approximate investors' expected values for R&D firms than the Fama and French Three Factor Model. This indicates that investors react rationally to changes in R&D expenditures regardless of the existing level of cumulated R&D investments and the market correctly anticipates the future benefits of increased R&D investments. Furthermore, the proposed model has successfully captured the riskiness of R&D activities and can compensate for the additional risks associated with the increase in R&D investments.|
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