R&D Intensity and Market Valuation of Firm
A Study of R&D Incurring Manufacturing Firms in India
Keywords:
R&D intensity, Firm value, Tobin’s q, Manufacturing firmsAbstract
This study examines the impact of R&D expenditure on the market valuation of firms proxied by Tobin’s q using firm-level data for manufacturing firms in India. To accomplish the research objective this study obtained data from the Prowess database of the Centre for Monitoring Indian Economy (CMIE) over the period of 2001-2010. The study forms an unbalanced panel comprising 2382 firm-year observations and employs Pooled-OLS and fixed effects models to analyze the relationship between R&D intensity and firm value as measured by Tobin’s q. The findings reflect an inverted U-shaped relationship between R&D intensity and a firm value indicating the diminishing marginal return to each unit spent on R&D. The result implies that R&D investment has a positive impact on the market value of the firm at the beginning, however, after a point these investments lower the market performance of firms.
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