Earnings and equity valuation in the biotech industry: Theory and evidence

Philip Joos, Alexei Zhdanov

Research output: Contribution to journalArticle

13 Scopus citations

Abstract

We examine how the price-earnings relation varies with the uncertainty about and the quality of a firm's investments. We develop a real option valuation framework to capture investment and abandonment options in the research-intensive biotechnology industry. We hypothesize that the price-earnings relation will be V-shaped and change over the firm's life cycle. We also show how nonfinancial information affects the pricing of earnings. Our empirical findings are based on a sample of 301 biotechnology firms that made IPOs between 1980 and 2000, and are generally consistent with our predictions.

Original languageEnglish (US)
Pages (from-to)431-459
Number of pages29
JournalFinancial Management
Volume37
Issue number3
DOIs
StatePublished - Sep 1 2008

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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