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Book-to-Market Effect in Low R&D Firms: Overreaction and Value Premium

This study analyzes the presence of the book-to-market effect in low R&D-to-sales ratio firms and discusses the impact of investor overreaction on stock valuation. While no value premium is observed in Taiwan as a whole, there is evidence of a value premium in firms with low R&D intensity. The results suggest a link between R&D investment and stock market dynamics, challenging existing theories. The paper highlights the need to reconcile empirical findings with theoretical predictions in understanding market behavior and value premiums.

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Book-to-Market Effect in Low R&D Firms: Overreaction and Value Premium

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  1. R&D, Risks and Overreaction in a Market where the Book-to-Market Effect is Reputedly Absentby Sheng-Tang Huang Weifeng HungChaoshin ChiaoTung-Liang Liao Discussant K.C. John Wei HKUST 2010 NTU Conference, December 10, 2010

  2. Summary of findings • In the whole sample, there is no book-to-market effect in Taiwan as documented by Chiu and Wei (1998) and others • However, in a subsample of firms with low R&D-to-sales ratios, there does exist the book-to-market effect • Explanation: the book-to-market effect arises from fundamental reversal, which is caused investor overreaction as suggested by Lakonishok, Shleifer, and Vishny (1994).

  3. Comments and Suggestions • Although there is no value premium in Taiwan as a whole, this study digs deep to find that there does exit a value premium in a subsample of firms with low R&D intensity. • I find the results of the paper interesting.

  4. Comments and Suggestions • However, the theoretical link between the empirical results and theory is quite weak. • What are the reasons that R&D can affect the book-to-market effect? • If your argument is correct, we should also observe that the value premium should be very weak in the Nasdaq firms. But I do not think that it is the case.

  5. Comments and Suggestions • Since your argument is mainly behavioral, then the behavior story predicts that the value premium should be stronger for firms with more information uncertainty. • However, your result seems to be inconsistent with this prediction.

  6. Conclusion • It is an interesting paper that finds that the book-to-market effect does exist in low R&D firms • However, how to reconcile the empirical results and the prediction of a theory is a challenge

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