R&D intensive firms are often described as (1) relying mainly on equity financing; (2) investing primarily in intangible assets; (3) exhibiting a high market to book ratio (a high Tobin’s q); and (4) as being young and fast growing. We put these commonplace characterizations to systematic empirical tests.
For our sample of Israeli manufacturing firms that issued stock in the 1990s, we present, for the first time, adjusted Flow of Funds charts that treat R&D expenses as a capital outlay (rather than an operating cost that reduces profits, as standard accounting principles prescribe). Our results indicate that the characterization is only partially appropriate for established firms engaged in R&D. Israeli R&D intensive firms that are traded on the Tel Aviv stock exchange indeed rely more on equity financing and exhibit a high market to book ratio, are younger but not faster growing than average, and do not invest primarily in intangible assets. In fact, they exhibit slower sales growth than average, and invest in physical capital more than average.
Our analysis also suggests that classifying firms as “R&D intensive” on the basis of the personnel they hire – a common practice in statistical bureaus – may not be ideal. Finally, we study the patterns of government aid for R&D.
