This paper employs Canadian stock market and corporate financial data to test the hypothesis that the market places a positive value on reported research and development spending of firms as an indicator of expected profitability and growth. The empirical results show a positive, statistically significant relationship between R&D spending and market value. The magnitudes of estimated coefficients are consistent with those reported in several published US studies. These results suggest that investment in R&D is a rational allocation of resources, contrary to the undervaluation hypothesis.
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Johnson et al. (1993) studied this question.
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