Firms engage in a variety of activities.

Some of these activities are straightforward, and

easy to assess how they will impact firm value (e.g., maintenance capital expenditures).
However, some of these activities, while crucially important for the discounted value of a
firms future cash flows, are quite uncertain and difficult to decipher how they will
ultimately impact firm value. Although hard to assess, it may still be the case that
analysis of publicly available information can give substantive insight into reducing the
uncertainty surrounding these actions.
The activity at the heart of our investigation is investment in research and
development (R&D). Given that R&D stimulates innovation and technological change,
which can in turn lead to improvements in productivity, living standards, and
economic output, the proper allocation of R&D investment in the economy is a critical
task of the market. And yet, this task is made difficult by the fact that R&D investment
is such a highly uncertain activity. Perhaps as a result of this uncertainty, R&D
investment has increasingly become a market-driven activity. Although the share of
R&D as a percentage of GDP has remained roughly constant (between 2-3%) since the
1960s, the composition of R&D investment in the economy has shifted dramatically,
away
from federal spending and toward private sector spending.1 Since the late 1980s, for
example, virtually all of the increases in total R&D spending have come from the private
sector. The markets role in allocating R&D investment has become more important
than ever.