Weifeng Hung

THE ABSENCE OF THE BOOK-TO-MARKET EFFECT IN THE TAIWAN STOCK MARKET: A DECOMPOSITION APPROACH

This paper examines the absence of the book-to-market equity (BM) effect in the Taiwan stock market, applying the BM decomposition proposed by Daniel and Titman (2006). First, we do not observe a significantly negative correlation between future stock return and intangible return on research-and-development-intensive firms in Taiwan, which is inconsistent with the US evidence documented by Daniel and Titman. Second, undervaluation of research-and-development-intensive firms possibly leads to the absence of the BM effect. Those firms, most of which have low BM, perform well not only in the past, but also in the future, thereby obscuring the BM effect.

R&D Increases and Long‐Term Performance of Rivals

We examine how a firms research and development (R&D) increases affect its intra-industry competitors in the long run. Consistent with the R&D spillover hypothesis, when a firm unexpectedly increases its R&D spending, its intra-industry competitors experience improvements in operating performance and analyst forecast revisions and earn positive abnormal stock returns in the long run. The industry concentration, which is related to the firms strategic reaction, is crucial in determining the magnitude of the R&D spillover effect.