| This study investigated aspects of the financial market valuation of highly-innovative firms whose core competencies involved the research and development of pharmaceutical, medical, or bio-technology. Relevant factors related to business operations were included to ascertain their association with two distinct measures of firm valuation: capitalized stock market value and abnormal stock market returns. The econometric assessment of this work placed emphasis upon capturing appropriate components of research and development, with inputs being measured in expenditures allocated and outputs reflected by successful patent grants and involvement with approved new molecular entities. Derived from the writings of Joseph A. Schumpeter, an integral component of this work was to ascertain if any differences existed between large and small firms.; The overall multivariate analysis of market capitalization indicated that diminishing semi-elastiticities existed with respect to increasing firm size for many of the variables in the econometric model. Substantial differences in the valuation makeup of companies also existed between firm size. The variable which remained significant for all group classifications, however, was R&D expenditures. Measures of innovative output, including patent grants and new molecular entities, were significant only for the larger firm classifications.; The analysis of the abnormal stock market returns indicated that larger companies received returns which were more consistently positive and less volatile, even though mean returns between groups were not statistically different. Accounting for the skewed nature of these data, however, the median returns differed substantially based upon firm size. The multivariate analysis of these returns did not reveal a trend that was consistent with either R&D inputs or outputs. Rather than noting significant associations with stock market returns and the determinants of innovative activity, this study found time effects to be of greater importance in the econometric model. More specifically, this purports that other phenomena may have had a greater impact on the abnormal returns, that the financial markets had difficulties appropriately valuing the securities with regard to future R&D benefits, or that positive returns were not guaranteed throughout the time frame even though overall R&D expenditures or innovative output increased. |
