The Market Value of R&D Investments Made by Companies Listed on the Johannesburg Stock Exchange
Date
2014-01-20
Authors
Hill, Graeme John
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Abstract
It is a prevailing view that South Africa under-invests in innovation. R&D spend is
consistently less than 1% of GDP, which is well below benchmarks set by
developed countries. The current research is concerned with R&D investments
made by the listed business sector. Specifically, the question of whether R&D
investments made by JSE listed companies are valued by the market is
addressed, and whether these investments are reflected in the share prices. A
cross sectional study has been carried out, in order to measure the impact of R&D
investments on market value. The research methodology is based on previous
studies carried out in developed and developing economies. Following a previous
Canadian study, a linear regression model with market value as the dependent
variable, and independent variables including book value, abnormal earnings,
R&D spend, and net investment, is used. The period chosen for the study is the 5-
year period from July 2007 to July 2012. Price data were obtained from the I-Net
Bridge database. Data on book value, earnings, R&D spend, and net investment
were obtained from financial statements as documented in the McGregor BFA
database. This resulted in a panel dataset, for a cross section of companies over
the study period. The study was not limited to any specific sector. Only the
financial services sector was excluded, due to the specialised nature of valuation
methods for such companies. It was found that approximately 60 companies
report R&D expenses each year, with an annual spend by JSE companies of
approximately R5bn. R&D investment is, however, highly concentrated, with 10
companies accounting for 80% of this spend. The linear regression analysis
concludes that R&D spend is an insignificant predictor of market value. The
research, therefore, fails to reject the null hypothesis that R&D activity has no
impact on market value. The market value of JSE listed companies can be
explained to a large degree (R2>90%) by the book value and abnormal earnings
variables. This result indicates that short term parameters (book value and current
earnings) are the primary drivers of market value on the JSE. While the literature,
covering studies in a number of countries, obtains similar results, most do observe
a positive effect of R&D on market value. The current result may reflect a short
term focus of investors during the volatile period chosen for the study. It is clear,
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however, that innovative activity, on average, plays a very minor role in the
fortunes of the listed business sector in South Africa.
Description
MBA thesis
Keywords
Research and development investments, Investments, Johannesburg Securities Exchange