Value Relevance of R&D Spending by Rivals



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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.





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Academy of Accounting and Financial Studies Journal

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Asdemir, O., Baowaidan, M., & Bugshan, T. (2013). Value Relevance of R&D Spending by Rivals. Academy of Accounting and Financial Studies Journal, 17(1), 103-117.

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