We examine whether stock prices fully value firms’ intangible assets, specifically
research and development (R&D) . Under current U. S. accounting standards, fi-
nancial statements do not report intangible assets and R&D spending is expensed.
Nonetheless, the average historical stock returns of firms doing R&D m atches the
returns of firms without R&D. However, the market is apparently too pessimistic
about beaten-down R&D-intensive technology stocks’ prospects. Companies with
high R&D to equity market value (which tend to have poor past returns) earn large
excess returns. A similar relation exists between advertising and stock returns.