Does the market value R&D investment by European firms? Evidence from a panel of manufacturing firms in France, Germany, and Italy

Several studies based on US and UK data have used market value as an indicator of the firm’s expected R&D performance. However, there have been no investigations for the continental countries in the European Union, in part because the analysis is complicated by data availability problems. In this paper we take a first step towards filling this gap using a newly constructed panel dataset of firms which are publicly traded in France, Germany, and Italy. Controlling for either permanent unobserved firm effects or sample selection due to the voluntary nature of R&D disclosure, we find that the relative shadow value of R&D in France and Germany is remarkably similar both to each other and to that in the US or the UK during the same period. In contrast, we find that R&D in publicly traded Italian firms is not valued by financial markets on average. However, when we control for the presence of a single large shareholder, we find that both French and Italian firms have high R&D valuations when no single 0167-7187/$ see front matter D 2005 Elsevier B.V. All rights reserved. doi:10.1016/j.ijindorg.2005.12.001 B We are grateful to the participants in the DRUID conference, Elsinore, June 2003, the EEA-ESEM conference Stockholm, August 2003, the AiIG Conference, Bergamo, October 2003, and seminar participants at University o Bologna, European University Institute, Carnegie-Mellon University, and Economicum, Helsinki for comments. Thanks also to Jim Powell for advice on the sample selection model, Federico Munari for suggestions on the ownership data Lucia Piscitello and Maurizio Sobrero for helpful comments on previous versions of this paper. Raffaele Orian acknowledges the support by Andrea Generale and other colleagues at the Research Department of the Bank of Italy fo the support received in creating the Italian sample. * Corresponding author. Tel.: +39 051 2093956; fax: +39 051 2093949. E-mail addresses: [email protected] (B.H. Hall), [email protected] (R. Oriani). INDOR-01603; No of Pages 23 , f