[Abstract]
Investment is commitments of resources made in the hope of realizing benefits that
are expected to occur over a long period of time in the future. Investment
decisions may be tactical or strategic. A tactical investment decision generally
involves a relatively small amount of funds and does not constitute a major
departure from what the firm has been doing in the past. Strategic investment
decisions may involve large sums of money and may also result in a major departure
from what the company has been doing in the past.
In this paper, we examine how small and medium-sized firm values are influenced by
new strategic investment. Firm strategic investments include both intangible assets
and tangible assets input. Intangible assets are defined as identifiable non-
monetary assets that cannot be seen, touched or physically measured, which are
created through time that are identifiable as a separate asset. Intangible assets
are typically expensed according to their respective life expectancy. Tangible
assets are distinguished from intangible assets such as trademarks, copyrights, and
Goodwill, and natural resources. Also includes accounts receivable of a concern.
Tangible and intangible assets are recorded separately on the balance sheet.
Physical assets are depreciated over their useful life; intangibles are amortized.
This study interprets value of accounting information of intangible and tangible
assets that has become common in a balance sheet using Ohlson Model.
Ohlson(1995) has proposed to redefine the Stock Dividends through the assumption on
clean surplus relation and to differentiate the surplus into such components as
normal surplus and excess surplus, thereby developing a valuation model that
integrates the surplus, book value and stock dividends together.
According to prior study, Wi(2006) analyze the relationship between the success of
R&D project about new contents and firm value in small and venture business, As a
result, he found statistically significant average abnormal returns(AAR) at event
day. And the meaningful average cumulative abnormal returns (ACAR) are observed
during event period. and Kim and Shin(2006) examined the value relevance of R&D
expenditures using a regression model. Empirical analysis has been performed for
non-banking venture firms listed over KOSDOQ. Kim and Kim(2006) examined whether
new investments in long-term operating assets have predictive power for future
abnormal earnings. They are motivated that investments in long-term operating
assets such as intangible assets are likely to generate positive net present
values, provided that firms management rationally makes capital budgeting
decisions. Jung(2004) investigated the effect of technology outsourcing on the
value of the firm in Korea. The result shows that the technology outsourcing in the
high growth industries gives positive effects on the value of the firm.
However, prior researches have primarily focused on R&D. Therefore, we investigate
the empirical relation between firm value and tangible as well as intangible assets
investments. And we test the investment opportunity hypothesis that growth
industries gives positive effects on the value of the firm.
Acceptance of a large strategic investment will involve a significant change in the
company's expected profits and in the risks to which these profits will be subject.
The future success of a business depends on the investment decisions made today.
Managers are generally aware of this is indicated by the requirement that important
investment decisions must be approved by the chief operating utive. In spite of
this fact, the procedures used to help management make investment decisions are
often inadequate and misleading.
Capital budgeting is a many activity that includes searching for new and more
profitable investment proposal to predict the consequences of accepting the
investment, and making economic analysis to decide the profit potential of each
investment proposal. In fact, the generation of positive net present values is
theoretically equivalent to the generation of future abnormal earnings. Thus firm's
new investments in long term operating assets are likely to affect future abnormal
earnings.
This research hypotheses were as follows.
Hypothesis 1 : The tangible assets investment will increase the firm value.
Hypothesis 2 : The intangible assets investment will increase the firm value.
Hypothesis 3 : The investment in the high growth industries gives positive effects
on the firm value
In order to test these hypothesis, we 952 small and medium-sized firms during 2003
¢¦2007 periods from KISVALUE program. The initial sample for this study was the
1098 firms but we exclude 146 firms with financial business, issues for
administration, non fiscal year in December, missing data observations.
We establish the following empirical basic regression models to examine our
hypothesis.
model 1£º=
model 2£º=
where V is firm value as the sum of market value of common stock. ; BBV is book
value except capitalized R&D costs; RD is research and development costs; RDC and
RDE are capitalized R&D costs and R&D expense; BREV is total revenue except R&D
expense; INV is tangible assets investment ; Y is control variable by year. To
eliminate the effects of scale, we normalize the firm value, R&D costs, total
revenue, tangible assets investment by the book value. The variables included in
the model are chosen on the basis of the results of previous studies.
(Table 2) shows summary the descriptive statistics for the main variables used in
our analysis. It shows that the means of firm value, intangible assets investment
and tangible assets investment are 1.253, 0.018 and -0.027. The standard deviation
of firm value, intangible assets investment and tangible assets investment are
6.232, 0.063 and 0.900. (Table 3) reveals correlation coefficients among the main
variables for the whole sample period. Firm Value is positively significant with
R&D but is not significant with tangible assets investment.
(Table 5) presents the results from the regressions of model 1. Those are
summarized as follows : The R&D variable has a significant at 1% level and positive
coefficient of 12.02. It implies that the R&D investment affect firm value. On the
contrary, the tangible assets investment(INV) variable is not significant (Table
6). reports the results from the regressions of model 2. we can find that the
coefficient on capitalized R&D expenditure(RDC) is positive and significant at 1%
level and the coefficient on non-capitalized R&D(RDE) is positive and significant
at 5% level. But the coefficient on INV is not significant. Thus, we can accept the
first hypothesis that the R&D investment will be related to firm value but we can't
accept the second hypothesis that the tangible assets investment will be related to
firm value.
For testing the investment opportunity hypothesis, we establish the following
empirical model 3.
model 3£º=
where D is the control variable of the high growth industries. and are the
coefficient of the R&D and tangible assets investments in all industries. and are
the coefficient of the R&D and tangible assets investments in the high growth
industries. Table 7 indicate that is not significantly positive and is not
significantly negative.
Our primary findings are summarized as follows£ºFirst, R&D investments is
positively related to the value of the firm but tangible assets investments is not
related to the value of the firm. Second, capitalized R&D expenditure is
statistically significant at 1% level and non-capitalized R&D investments are
statistically significant at 5% level. Third, according to the test of investment
opportunity hypothesis, there is no differences of two industries.