The Stock Market Valuation of Research and Development Expenditures
Source: Chan, Lakonishok & Sougiannis (2001) · The Journal of Finance · DOI: 10.1111/0022-1082.00411
TL;DR
Because U.S. GAAP expenses R&D, R&D-built intangible assets never appear on the balance sheet. Chan, Lakonishok & Sougiannis find that, on average, firms doing R&D earn returns similar to firms with none — but R&D intensity matters in two pockets: among growth stocks, R&D-intensive firms outperform low-R&D peers, and firms with high R&D relative to market value (which tend to have poor past returns) show strong signs of mispricing and subsequently outperform. Advertising shows a similar pattern. The market underweights the payoff to intangible investment.
What anomaly it documents
Predictor: R&D intensity, especially R&D scaled by market value of equity (and, similarly, advertising).
Direction: positive — high R&D-to-market firms (and R&D-intensive growth stocks) earn higher subsequent returns; R&D alone (vs no R&D) is return-neutral on average.
Shape: extreme-quintile alpha ≈ 0.60% per month in the first year; effect concentrated where R&D is large relative to a depressed market value.
OSAP predictor: R&D / AdExp.
How to construct it
Sorting variable: R&D (and advertising) scaled by market value of equity; portfolios formed at end of April each year.
Universe: R&D-reporting NYSE/AMEX/Nasdaq firms.
Portfolio formation: rank into R&D-to-market quintiles.
Long / short: long high R&D-to-market, short low.
Weighting: the paper reports quintile-portfolio alphas.
Rebalancing: annual.
Evidence and replication
Period
Notes
Source
1975–1995
R&D firms ≈ non-R&D on average; high R&D-to-market quintile α ≈ 0.60%/mo (yr 1)
this paper
Advertising
similar mispricing pattern for advertising intensity
this paper
OSAP (R&D / AdExp)
replicates
Chen & Zimmermann 2022
Why it might work
Intangibles omission: expensed R&D is missing from book value, so R&D-rich firms look deceptively expensive on book-to-market and the market underprices the option value of R&D.
Pessimism correction: high R&D-to-market firms have depressed prices/past returns the market over-discounts.
Risk note: the paper documents that R&D intensity is positively associated with return volatility.
Limitations and risks
Value entanglement: scaling by market value mixes in the value effect.
Sector concentration: clusters in tech/pharma.
Fundamentals dependence: needs R&D (and advertising) line items.
Key references
Chan, L., Lakonishok, J. & Sougiannis, T. (2001) — The Stock Market Valuation of Research and Development Expenditures — Journal of Finance — DOI: 10.1111/0022-1082.00411
Eberhart, A., Maxwell, W. & Siddique, A. (2004) — Long-Term Abnormal Returns Following R&D Increases — JF
Provenance: verified against the paper's full text (open-access PDF via Semantic Scholar); figures quoted are from the paper.
