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Student
Title
Supervisor
Faculty
Educational Programme
Final Grade
Year of Graduation
Albert Levin
The Impact of the Research and Development Expenditures of the Firm on its Equity Cost of Capital
Economics
(Bachelor’s programme)
10
2016
Research and development expenditures (R&D) include the expenses on those activities of the firm which were undertaken in order to facilitate the elaboration of new knowledge or the development of a new product. Due to imperfect disclosure of these expenditures in the firm`s financial statements, outside investors encounter significant difficulties while attempt to evaluate future benefits from R&D expenditures. More than that, R&D expenditures of the firm put a strain on its retained earnings in the period when they were incurred. Hence, investors may, ceteris paribus, demand higher return on equity for the firm with higher R&D expenditures. The aim of this article is therefore to investigate the influence that R&D expenditures of the firm exert on its equity cost of capital, employing a mixed sample, which consists of both developed (Republic of Korea, Finland, and Israel) and developing (Russia, Brazil, Poland, and South Africa) capital markets. As R&D expenditures of the firm may correlate positively with its size, the R&D variable was scaled by either the firm`s revenue or its market capitalization, resulting in the so-called R&D-intensity of the firm. For the purpose of investigating the relationship between the R&D expenditures of the firm and its equity cost of capital, the author resorts to various techniques, which involve double-sorting Fama and French (1993) approach to forming portfolios, a three-factor asset pricing model elaborated by the author himself, and Fama and MacBeth (1973) two-step procedure. Employing these empirical instruments, the author succeeds in discovering a statistically significant R&D expenditures-cost of equity relationship, affirms all proposed hypotheses and resolves all set goals. In addition, the author retrieves possible drawbacks of this three-factor asset pricing model, and suggests approaches to adjusting it appropriately.

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