VALUE RELEVANCE OF R&D SPENDING BY RIVALS
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Research and development expenditures, knowledge spillovers, negative spillovers, stock valuation
Firms make use of the external technology knowledge obtained from their rivals in order to improve their productivity and profitability. The positive impact of rivals’ R&D on a firm’s profits is known as knowledge spillovers. On the other hand, an innovating firm will not be able to price a new product to fully capture the value of its innovation due to competition. Furthermore, there are times when a rival's innovation activities might make a firm's products obsolete. This results in negative spillovers, in which case rivals’ R&D hurts a firm’s performance. The interplay of knowledge and negative spillovers together determines the direction of the overall impact of rivals' R&D on the firm's stock valuation. We provide evidence that rivals' R&D is significantly and positively associated with stock valuation of firms. To our best knowledge, ours is the first study to show a positive association between R&D expenditures of rivals and firm's stock market valuation. We further show that the impact of industry R&D on stock valuation is higher in industries where R&D expenditures are dispersed among several firms compared to industries where R&D is concentrated among a few firms. Finally, we show that investors differentiate firms based on their absorptive capacity of rivals' R&D.
Academy of Accounting and Financial Studies Journal