Equity valuation using accounting numbers

: research question : effects of R&D intensity

Abstract

Recent studies have been studying effects of R&D intensity in equity valuation, e.g. by analyzing the telecommunication industry, Amir and Lev (1996) conclude accounting numbers to be useless for this purpose. As a consequence, literature has been raising the question of whether R&D expenses are properly priced and represented in the main valuation methods adopted by analysts. This dissertation pretends to approach this question by establishing and testing 8 hypotheses for two different samples, a large and a small. The intention is to alert the user about how methodologies for equity valuation vary within different levels of R&D intensity. Empirical results suggest that R&D intensity tend to deteriorate models’ performance, being the Price Earnings Ratio the most effective. On the other hand, empirical results suggest analysts to ignore performance effects of R&D intensity when valuing firms as there are no differences in their preference for valuation models between the two groups. Moreover, there is no significant difference between analysts’ pattern of recommendation (considering ‘buy’ and ‘sell’ against ‘hold’). Finally, despite drawbacks of cash flows figures when compared to earnings, there is evidence of analysts’ reliance on it when using flow based valuation models.

Date of Award	10 Jul 2013
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Geraldo Cerqueiro (Supervisor)