Earnings and Equity Valuation in the Biotech Industry: Theory and Evidence

Philip Joos () and Alexei Zhdanov ()

Financial Management, 2008, vol. 37, issue 3, 431-460

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.

Date: 2008
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https://doi.org/10.1111/j.1755-053X.2008.00020.x

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