The effects R&D expenditures on the market value in the telecommunication industry-evidence from North America

y relative to return volatility, after manufacturing firms. By empirical study of 
controlling for firm size, age and industry a 40 year period 1962-2001, Ho et al (2005) 
effects. By using a sample of around 1200 show that intensive investment in R&D 
companies’ expenditures on R&D, Lev and contributes positively to the one-year stock 
Sougiannis (1999) provide some evidences market performances of manufacturing 
(1) low market-to-book companies have a firms but not for non-manufacturing firms.
large R&D capital and vice versa; (2) the In recent research, Sakakibara et al 
ratio of R&D capital to market value is (2006) have found that R&D expenditures 
closely relative to the book-to-market ratio; contribute to operating income for five years 
(3) the return premium is essentially higher on average for firms listed in Tokyo stock 
for risky R&D (basic research) than for exchange. Moreover, they also find R&D 
lower risk R&D (development). capital information is reflected in stock 
 Throughout the empirical study, prices throughout analyzing relationship 
Sougiannis et al (2001) show that the market between R&D capital and subsequent stock 
is apparently too pessimistic about beaten- return of manufacturing enterprises. 
down R&D intensive technology stocks’ III. Empirical Studies
prospects. Firms with high R&D to equity 
 Overall, the effects of R&D 
market value earn large excess returns. 
 expenditures have been carefully studied 
Furthermore, Amir et al (2005) also consider by many scholars in theoretical aspects 
the effective R&D expenditures on the future as well as empirical studies. However, 
earnings. They build a model to estimate most previous studies focus on the whole 
the association between R&D investment economy or some particular sectors such as 
and capital expenditures (CAPEX) and the pharmaceutical industry, non-manufacturing 
variance of future earnings per share and and manufacturing firms. In recent time, 
operating income. They provide evidence many authors have concentrated on exploring 
that R&D investment lead to higher volatility the hot muddles of outsourcing R&D. Here, 
of future earnings than capital expenditures we focus on analyzing the linkage between 
only in R&D-intensive industries, where R&D expenditures and market value of 
industry R&D intensity is measured as the firms in the telecommunication industry. 
R&D-to-CAPEX ratio. Besides, they also A brief background of 
show that the stronger association of R&D telecommunication industry
with uncertainty in future earnings is a Telecommunications is playing a very 
recent phenomenon. important not only in its own right, but 
90 Ho Chi Minh City Open University Journal of science- No. 1(1) 2011
also in building a significantly backbone respective R&D expenditures per share 
infrastructure to support other industries (R&Dps). 
to develop. As a result, many governments 
 (PPS)it = bit + ait (R&Dps)it. (1)
usually consider investing and protecting Our hypothesis is that firms with 
their own telecommunication industry as a higher R&D should have higher PPS, 
monopolistic sector. However, the effect of ps
 so we expect the slope coefficient (ait) to 
Telecommunication Act 1996 in USA has led be positive.
to increasing competition and declining in 
regulations, thereby encouraging innovations We are using the database constructed 
 from consecutive COMPUSAT in the 
and increasing in R&D investment, 
 period 1971-2005 for S&P industrial 
enhancing many services with lower prices. 
 annual. After performing the filtering 
As a result of the Act is not only significant 
 process, we are only able to identify 
for American customers, but also leads to 
 287 telecommunication firms with 2261 
other countries to pursue such as France, 
 observations from the R&D Master file 
Germany, Japan and UK and so on. The most 
 used to run the regression model.
important result is that the liberalization of 
telecommunication markets has moved to First, we pool all usable observations 
the world stage under auspices the World of the database to estimate regression 
Trade Organization (WTO) (Jerram at el, Equation (1). Results of a regression 
 of PPS against R&D for S&P annual 
1997-1998, chapter 4: Liberalisation: Case ps
studies in telecommunication). telecommunication firms in period 1971-
 2005 are presented as follows:
 Because of a particular 
telecommunication sector, it has encouraged PPS = 12.334 + 5.421 R&Dps (2)
us to study the linkage between the firm’s The estimated value of the slope 
market value and R&D expenditures in this coefficient, ait = 5.421, is positive and 
sector throughout a very simple model. statistically significant at the 1% level. 
In other words, we consider the following These results support our hypothesis and 
regression of the contemporaneous prices expectation. We can see more details of 
of a sample of firms at date t against their regression result in Table 1.
 Table 1 Price per share (PPS) against R&Dps
 Analysis of Variance (Year 1971-2005) 
 Sum of Mean
 Source DF Squares Square F Value Pr >
 F
 Model 1 44148 44148 117.87
 <.0001
 Error 2259 846074 374.53484 
 Corrected Total 2260 890222
 Number of Observations Used 2261
 Parameter Estimates 
 Variance Parameter Standard
 Variable DF Estimate Error t Value Pr > |t| 
 Inflation
 Intercept 1 12.33408 0.51425 23.98 <.0001 
 0
 RD_per_Share 1 5.42123 0.49933 10.86 <.0001 
 1.00000 
 Ho Chi Minh City Open University Journal of science- No. 1(1) 2011 91
 Now, we consider the linkage of we estimate the Eq(1) by using data on 
price per share and R&D expenditures 287 telecommunication firms in the S&P 
per share of 287 telecommunication firms industrial annually for 1971 to 2005 and 
in the S&P annual industrials from 1971- retain the estimated slope coefficient, 1ta , for 
2005 conducted from COMPUSTAT. We each year. This coefficient can be explained 
estimate the R&D expenditures per share as the average market value of $1 of R&D 
of each firm and each year against its expenditures per share. These estimated 
respective price per share. In other words, coefficients are illustrated in Figure 1.
 Figure 1: The effect of R&D on share price 
 Price per share Ratio of R&D per share 
 40 3 
 35 
 2.5 
 30 
 2 
 25 
 PPS 
 R&D per share 
 20 1.5 
 15 
 1 
 10 
 0.5 
 5 
 0 0 
 1971 2005 
 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 
 1973 1975 1977 1981 1987 1989 1991 1993 1995 1997 1999 2001 2003 
 1979 1983 1985 
 Year 
 In general, we can easily see from telecommunication Act in 1996 also affected 
Figure 1 that R&D expenditures per share in on declining this ratio. Overall, after 1996 
the telecommunication sector fluctuated and the R&D investments in telecommunication 
sharply increased during the period 1985- firms have been diversified and spread 
1994. One of many reasons able to interpret in many competitive firms, instead of 
this phenomenon is that this period rapidly concentration on monopolistic firms as 
emerged internet and the transmission before. This could be one of main causes 
control protocol (TCP)/internet protocol leading to the deterioration. In addition, the 
(IP) wide area network. The opening of influence of the general condition of the
the network to commercial interests was US stock market bubble which imploded 
implemented in 1985. The TCP/IP became in 2001 is the other major factor leading 
increasingly popular in 1990s. Moreover, to declining R&D expenditures per share 
most of telecommunication providers also in the late 1990s and following years. In 
focused on upgrading the network and other words, this reduction is as a result of 
increasing in R&D expenditures to catch up the economy facing up the following stage 
the cutting edge of technological advantages. of underinvestment. The reduction of RD 
However, this ratio strongly declined in 1995 investment is also due to the result of the 
and then slowly reduced following years. internet bubble period 1996-2000. Generally 
One of the main reasons for explaining the speaking, our results consistent with prior 
sharp reduction is due to the effective of an empirical research, for example, the R&Dps 
antitrust decree in 1994, as a result of the in the telecommunication sector achieved 
break-up AT&T from its local telephone the peak at $2.7 in 1993. Similarly, the 
monopolies and this change led to the way R&Dps for the S&P industrials also achieved 
on liberalization of telecommunication the peak at around $4.6 in 1993 and then it 
market. Furthermore, the effective tardily decline (see Figure 2). The fluctuation 
92 Ho Chi Minh City Open University Journal of science- No. 1(1) 2011
of R&D expenditures of telecommunication 2005. The number of telecommunication 
firms has closely associated with the R&D firms in our sample is the same as before
expenditures of the whole economy. This (287 firms) but the number of observations 
once more provides a strong evidence to is increased from 2261 to 2312. The data 
prove that the telecommunication sector process is the same as the above description 
has been playing a very important role in of the first model. After pooling all of
supporting other industrials to develop and observations, we run the regression model 
contributing a significant proportion in the and get the following result:
whole economy.
 (PPSit)= 7.774 + 0.369 (TAps) + 2.261 (EPS) + 
 Second, we can easily recognize that 
 2.814 (R&Dps) (4)
PPS could be influenced by other factors As our expectation, all of the 
behind R&D expenditures such as total coefficients are positive and statistically 
assets per share (TA ) and earning per 
 ps significant at 1% level. Besides, the adjusted 
share (EPS). Our hypothesis is that the R2 is 42.53 percent much larger than that of 
telecommunication firms with the higher the first model. We can see more details of 
TA , higher EPS or higher R&D expenditure 
 ps the regression results in Table 2.
per share should have the higher PPS. 
Therefore, Eq.(1) is modified by adding two Now, we consider the estimated 
additional independent variables including coefficients in Eq.(4), we easily see that 
 the coefficient of R&D is the largest one 
TA and EPS. ps
 ps (2.814). It means that R&D expenditures 
(PPS )= a + b (TA ) + c (EPS) + d (R&D )
 it it it ps it it it it ps it contribute an essential portion in 
 (3) determining PPS. The second largest one is 
 To test the new regression model, we the coefficient of earning per share (2.261) 
also use the COMPUSTAT annual industrials. and the smallest one is the coefficient of 
However, we extend the time series period total assets per share (0.369).
from 1950 to 2005, instead of period 1971-
 Table 2 
 Regression of Price per share (PPS) against (TAps), (EPS) and (R&Dps)
 Analysis of Variance (Year 1950-2005) 
 Sum of Mean
 Source DF Squares Square F Value Pr >
 F
 Model 3 505033 168344 571.03 
 <.0001
 Error 2308 680421 294.80995 
 Corrected Total 2311 1185455
 Number of Observations Used 2312 Total firms 287 
 Parameter Estimates 
 Variance Parameter Standard
 Variable DF Estimate Error t Value Pr > |t| 
 Inflation
 Intercept 1 7.77401 0.48213 16.12 <.0001 
 0
 TA_per_share 1 0.36931 0.01384 26.68 <.0001 
 1.34727 
 EPS 1 2.26103 0.17784 12.71 <.0001 
 1.31875 
 RD_per_Share 1 2.81486 0.42548 6.62 <.0001 
 1.03151 
 Ho Chi Minh City Open University Journal of science- No. 1(1) 2011 93
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