Analysis of Lead Time between R&D Investment and Firm Value Appreciation

Abstract

Most previous studies find positive relationships between R&D investments and firm value. This paper is the first study showing the degree of this positive relationship by quantitatively measuring the lead time between R&D investment and its effect on firm value. This study aims to accomplish this by using panel vector auto-regression (PVAR) and IRF (Impulse Response Function). Our results show lead time varies by relevant factors such as industry concentration, firm size and growth potential. The positive impact factors on firm value shortens the lead time, while the negative impact factors lengthen the lead time. The lead time in high competition environments is almost zero; however, in low competition environments the lead time is two to four years at minimum. For the medium competition group which follows the inverted U-shape theory, the lead time is five years. In regards to the effects of size and growth, the lead time for R&D investment to impact firm value is much shorter, close to zero, for larger size with high growth firms; however, for medium to small size firms with medium to low growth potential, it is about four to eight years.