Namryoung Lee

School of Business, Korea Aerospace University,

South Korea

nrlee@kau.ac.kr

R&D accounting treatment, firm performance, and market value: Biotech firms case study

Abstract. This study examines the correlation between R&D accounting treatment and market value in association with the firm’s performance, with a focus on biotech firms. Firstly, the results of the analysis show that capitalized R&D has a positive correlation with market value, consistent with existing literature. In the case of biotech firms, capitalized R&D has a higher value relevance compared to other industries. Secondly, this study examines the effect of a decrease in capitalized R&D on market value. It is found that the decrease in capitalized R&D has a negative effect on market value, however, this is not the case for biotech firms. In particular, in years where major biotech firms acknowledge and correct their accounting error, capitalized R&D decrease seems to have a more positive effect on market value. Additionally, this study extends the inquiry in association with the company performance and finds the decrease in capitalized R&D has a significant positive association with market value when the firms get better performance. But when the firm’s performance gets worse, a decrease in capitalized R&D adversely affects the market value. However, this is not the case for biotech firms, suggesting excessive expectation around the R&D process of biotechnology firms.

Received: August, 2018

1st Revision: December, 2018

Accepted: May, 2019

DOI: 10.14254/2071-8330.2019/12-2/4

JEL Classification: M41, G32

Keywords: R&D accounting treatment, decrease in R&D capitalization, biotech, market value