The Nonlinear Value Relevance of R&D Investment in Listed Companies on Korean Stock Markets

This paper investigates the nonlinear value relevance of R&D investment in companies listed companies on Korean stock markets from 2001 to 2011. For examining whether the role of R&D investment is linear or nonlinear function in valuing market value of equity, this study uses ‘converted Ohlson(1995) model’ by inserting R&D investment variable in original Ohlson(1995)’s valuation. Moreover this paper replicates empirical method of Morck et al.(1988), Choi et al.(2009) and Shin et al.(2011) by adding square value of R&D investment in ‘converted Ohlson(1995) model.’ to test nonlinear function between R&D investment and market value of equity. This paper also splits total sample data into several subgroups according to the belonging markets, firm size, and technology level to observe the value relevance changes of R&D investment. Empirical results show evidences on the role of R&D investment in valuing market value of equity. Contrary to the general assumption about the linear function of R&D investment in valuing market value of equity, R&D investment has nonlinear(inverted U-shape) value relevance in every sample group(total sample, KOSPI firm group, KOSDAQ firm group, large firm group, small & medium firm group, high technology firm group, and low technology firm group) which is split by a firm’s characteristics. This result suggests that not all R&D investment could promote market value of equity, and rather excessive investment in R&D may decrease a firm’s value.