Longitudinal Market Valuation of Unexpectedly Increased R&D Expenditure with the Real Option Logic

This paper examines how the real option value of R&D expenditure in financial market changes as time proceeds. It examines the relations between the R&D capital and the firm value for 4 years from the time a firm increases its R&D expenditure unexpectedly. The results show that the financial market evaluates the unexpected increased R&D with real option logic. We find that the financial market takes account of the market uncertainty and the technology uncertainty of R&D for the valuation of firms. These effects appear significantly right after the R&D capital increases unexpectedly. However, the lasting period of them is shorter than 1 year. The operational performance doesn’t have any relation with the firm value in our analysis.