Understanding Information Decay in Firm Valuation -- A Case from Taiwan Biotech Industry

Biotech stocks are attractive to investors due to their potential to generate significant profit in a relatively short time period. Considering the unique innovation-driven nature of biotech industry, the valuation of biotech companies involves a broad spectrum of considerations, including both financial factors commonly used for estimating/forecasting corporate value and certain types of non-financial factors such as patents and R&D activities. In this paper, we investigate the capabilities of predicting firm value over different time horizons based on the data from Taiwan's biotech industry. The variables of ROA, ROE, operating profit margin, net income ratio, Tobin's Q and stock price are used to measure firm value. These variables are either being predicted separately or together as a whole, and prediction accuracy is tested across different predictor variable time lags. A 2-quarter lag appears to result in a better prediction for ROE, stock price and net income ratio, and a 1-quarter lag for ROA, regardless of whether a single variable is being predicted or several combined. Using very recent information does not necessarily lead to effective firm valuation as information decay may not be an immediate effect. This implies cost savings from keeping various financial and non-financial factors up-to-date which may be tedious and time consuming