The R&D Effect on Firm Value in the Information Technology Industry

Innovation enhances corporate value and offers the underlying company a new competitive advantage, strategic and financial benefits and potential for survival and future growth. As a proxy for innovation, we use the expenditures in research and development (R&D) and the intangible assets of the company following the relevant literature. This paper focuses on the European markets. The objective of the paper is to investigate first whether R&D expenditures and intangible assets affect the value of the underlying company and if they do so, in what way and second whether they affect the performance of the company. Our sample consists of the companies in the information technology (IT) industry in Europe, the most innovative industry. We apply several regression models to test our hypotheses. Our results indicated a positive relation between the innovative investments as proxied by the research and development expenses and the intangible assets with the firm's value. However, regarding the company performance as measured by the ROA and ROE, our results rejected our hypothesis since we found a negative relation between the innovation variables and the profitability ratios as performance variables.