Impact of R&D Intensity on Market Capitalization

Abstract

The present study is an attempt to assess the impact of Research & Development (R&D) intensity, profit margin and firm size on market valuation of firm proxied by Tobin's q with special reference to pharmaceutical sector. The pharmaceutical industry has been chosen due to intensive research and development expenditures. There are many pharmaceutical companies listed on the BSE and NSE but 25 companies have been chosen at random and analyzed for a period of 10 years from 2005 to 2014 through regression technique. Theoretically, it sounds true that when a company invests in R&D, it increases the probability of
innovation and thereby improved growth prospects which reflects in the market capitalization. An attempt has been made to test this hypothesis and much to our surprise, this assumption does not hold true in case of
pharmaceutical sector.