The Valuation of Corporate R&D Expenditures: Evidence from Investment Opportunities and Free Cash Flow

Abstract

We examine the importance of investment opportunities and free cash flow in explaining the market response to announcements of product strategies and capital expenditures. Our study, which uses Singapore data, supports the investment opportunities hypothesis that investments by high-q firms are worthwhile while those by low-q firms are not. We find no support for the free-cash-flow hypothesis. Our results are similar to those for R&D investments, which suggests that the availability, or lack, of investment opportunities is an important consideration in assessing the value-enhancing potential of corporate, strategic investments in general.