The stock market valuation of intangible expenditures: An empirical examination of US Net Firms

We examine whether stock market fully value intangible assets, especially R&D and Advertising expenses in a specific sample of firms: US net firms along eight years (1996 until 2003). We find that the market value-to-book increases when the return on equity is positive, but also rises as return on equity becomes more negative. We argue that the negative pricing is due the collision of large expenditures in R&D and Advertising that are subject to conservatism accounting practice. Our results are robust when compared with a sample of recent contemporaneous IPOs of US net firms. We are able to conclude that: i) investors look beyond aggregate earnings, ii) that investors value certain components of losses (R&D and Advertising expenditures) positively, iii) capital markets seem to give strong value to firms undertaking such investments, iv) and that the presence of growing R&D and Advertising expenditures, implies that the persistence of losses may have become a weaker indicator of likelihood of liquidation, v) when faced financial distressed, the mergers an acquisitions is the main strategy to exercise the growth option and maximize the value of the firm and vi) consequently analyse loss firms homogenous can lead incorrect specifications