The Impact of R&D on the Value of European Firms

The purpose of this paper is to provide additional research on the market valuation of R&D in Europe, and also to shed light on some firm and country characteristics which sensibly modulate the effect of R&D on firms' value. The analysis is performed using a panel regression approach with fixed effects, including time and country effects, for years 2001-2007. Empirical results show that the effect of R&D expenditures is positive and significant across countries with the exception of Italian firms, confirming previous evidence on this topic. R&D is most highly valued for firms that operate in hi-tech sectors, whereas it remains negative for low-tech ones. Size generally presents negative returns to scale for these firms, indicating that small firms which operate in hi-tech industrial sectors are able to invest more efficiently in R&D. Firms that operate in low-tech industries can achieve consistent returns to scale due to their alternative investment in innovation. Well-developed loan and equity markets and a high level of shareholder protection have a positive effect on the market valuation of R&D. The empirical results we achieve offer an interesting point of view about the effect of R&D on firms' performance across European financial markets