Abstract
<p>Firms make use of the external technology knowledge obtained from their rivals in order to improve their productivity and profitability. The positive impact of rivals’ R&D on a firm’s profits is known as knowledge spillovers. On the other hand, an innovating firm will not be able to price a new product to fully capture the value of its innovation due to competition. Furthermore, there are times when a rival's innovation activities might make a firm's products obsolete. This results in negative spillovers, in which case rivals’ R&D hurts a firm’s performance. The interplay of knowledge and negative spillovers together determines the direction of the overall impact of rivals' R&D on the firm's stock valuation. We provide evidence that rivals' R&D is significantly and positively associated with stock valuation of firms. To our best knowledge, ours is the first study to show a positive association between R&D expenditures of rivals and firm's stock market valuation. We further show that the impact of industry R&D on stock valuation is higher in industries where R&D expenditures are dispersed among several firms compared to industries where R&D is concentrated among a few firms. Finally, we show that investors differentiate firms based on their absorptive capacity of rivals' R&D.</p>