Review of Industrial Organization
13: 425–446, 1998.
1998 Kluwer Academic Publishers. Printed in the Netherlands.
Cooperative R&D and the Value of the Firm
Department of Economics, School of Business and Management, The Hong Kong University of
Science and Technology, Clear Water Bay, Kowloon, Hong Kong
K.C. JOHN WEI
Department of Finance, School of Business and Management, The Hong Kong University of Science
and Technology, Clear Water Bay, Kowloon, Hong Kong
Abstract. In this paper, we investigate the stock price responses of listed ﬁrms in the U.S. markets
to announcements of R&D collaborations. We ﬁnd that abnormal returns of stocks are signiﬁcantly
positive after R&D collaborations are announced. The positive stock price response towards the
R&D cooperation initiations can be partially explained by the nature of the collaborations and the
characteristics of the participating ﬁrms. We also ﬁnd that the stock prices of rival ﬁrms respond
negatively to announcements of R&D cooperation. This result seems to support the hypothesis
that cooperative R&D improves economic efﬁciency of the cooperative ﬁrms that gain competitive
advantage. We do not ﬁnd evidence supporting the hypothesis that R&D cooperation creates collusive,
anticompetitive effects in the product market.
Key words: R&D cooperation, collusion, economic efﬁciency, stock market reaction.
R&D cooperation among innovative ﬁrms is a topic of continued interest in pub-
lic policy debate. Normative analysis leads to conclusions that cooperative R&D
can bring social beneﬁts such as the alleviation of appropriability and strategic
investment problems, the elimination of costly duplications in R&D effort, the
realization of economies of scale, and the reduction of risk. The improvement in
social welfare due to R&D cooperation can be substantial, provided that careful
measures are adopted to maintain competition during the production and marketing
We thank William Baumol, Richard Levin, Sheridan Titman, the General Editor of the Review,
two anonymous referees, and seminar participants at the City University of Hong Kong, the National
Taiwan University, the Tamkang University, the 4th Osaka International Finance Conference, and
Annual Conference of the European Association for Research in Industrial Economics
for their helpful comments. We thank Rossanna Cheung, Yanxia Song and Swallow Wei for their
research assistance and Dr. Martha Dahlen and Dr. Virginia Ann Unkefer for their editorial assistance.
Financial support from the Hong Kong Research Grants Council (HKUST 156/93H) is gratefully