Effect of R&D and Advertisement on the Market Value of Firm: Evidences from Indian Firms

Abstract

A strand of literature on Innovation suggests that discretionary expenses, such as research and development (R&D), and advertisement expenses have mixed effects on the value of the firm. To provide recent evidence from a developing country context, specifically the Indian context, this article explores the relationship between discretionary expenses and the value of a firm. With the help of the Centre for Monitoring Indian Economy prowess database for 680 Indian firms belonging to 41 industries over a 15-year period covering 5,171 firm years, we find that both R&D and Advertisement Expenditure have a positive effect on the market value of a firm. Our results suggest that the effect of R&D on the value of firms is more in smaller and younger firms when compared to large and mature firms, respectively. We also find that the return to R&D investment is more in non-manufacturing firms. JEL Codes: G10, L2, O31, O32.