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This paper focuses on how a firm's characteristics affect the market valuation of its research and development (R&D) spending. We derive a valuation model based on the capital market arbitrage condition. The estimation of this model by using the Generalized Method of Moments and data from the eurozone countries yields interesting results. Several firm characteristics (namely, size, firm growth and market share) are found to positively affect the relationship between firm value and R&D spending, while others (specifically, free cash flow, dependence on external finance, labour intensity and capital intensity) exert a negative effect. Therefore, the effectiveness of the R&D spending depends on the firm characteristics.
