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10.01.06

R&D activities influence long-term performance and IPOs

Last year I met Baruch Lev from the Leonard N. Stern School of Business (New York) for the first time and I was very impressed by his personal style and clear thinking. For me, he is one of the most influential academics in the field of management/reporting/&measurement of intangible assets. Besides that, he is one of the few who actually leaves his academic environment and joins forces with business consultants and business leaders. His contributions to the ’soft’ issue of intangibles is almost always grounded on rigour research and figures.

In a recent paper Baruch (together with Re-Jin Guo and Charles Shi) examined the effect of R&D intensity on IPO and long-term corporate performance. The results show a short-term underpricing and a long-term underperformance of IPOs. In their study the authors provide direct evidence that the uncertainty and risk of R&D mitigate investor optimism at IPO.

In other words, investors are overconfident with low R&D issuers, while being highly cautious with issuers showin high R&D activities. Since the positive effects of R&D will have a time lag, those high R&D IPOs exhibit a better performance in the long term than low or non R&D issuers.

A crucial topic the authors also examined is the effect of disclosure of information on the valuation of a company. The authors state: ’We accordingly document the link between information disclosure about R&D (reducing asymmetry) and IPO underpricing by comparing the underpricing associated with pharmaceutical and biotech IPOs—companies that uniformly disclose extensive information about the nature of R&D (success of products under development and prospective outcomes)— with the underpricing of other R&D-intensive issuers that disclose considerably less information on their R&D activities. We find that pharmaceutical and biotech IPO underpricing, despite the generally high uncertainty associated with drug development, is substantially lower than the underpricing of other R&D intensive issues. Thus, enhanced disclosure about the nature of R&D activities and prospective outcomes reduces information asymmetry and is thus rewarded by diminished underpricing.’

This comes back to the value of intellectual capital reporting. It creates not only internal value (learning, knowledge generation, communication, strategic puropose, core capabilities etc) but also external value.

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