Most of the past studies have managed to confirm the value-relevance of R&D, but few of them have formally addressed the issue of knowledge spillovers. In reality, firms improve their know-how both by producing new knowledge and by learning from others. The objective of this study is to examine the relevance of R&D and knowledge spillovers as an explanation for the observed inconsistency between market and book values. While the level of R&D is measured by R&D expenses and patent counts, the intensity of knowledge spillovers is measured by tracing the linkages between inventions across time as established by patent citations. Specifically, knowledge spillovers are decomposed into intraindustry, internal, and interindustry spillovers. The empirical findings from this study conclude that R&D and knowledge spillovers are value-relevant. The results also suggest that, among the three components of spillovers, intraindustry spillovers have the strongest impact on market-to-book ratios.
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