The Market Value of Innovation

This study examines the relationship between the market value of the firm and part of its intangible capital. Two types of intangible capital are investigated: the flow of R&D expenditures and a measure of R&D stock. The paper analyses the empirical results in each national context which is characterized by sharp structural differences. We also investigate how and to what extent the different legal and corporate governance regimes, and thus the different degrees of investor protection, affect a firm's corporate value and the market valuation of R&D investments. The analysis is performed in a panel dataset of European listed companies from 2000 to 2009. The results indicate that information relating to research and development plays a key role in determining the market value of companies. The market evaluates not only the present but also the past investment in R&D. Overall, our evidence suggests that significant differences between countries emerge in the market valuation of research and development. These differences reflect the distinct features of the financial systems herein considered