ABSTRACT
Research and Development (R&D) is usually a risky and long-term form of investment and there is considerable evidence that the stock market undervalues R&D capital. A number of reasons have been put forward to explain this phenomenon and most of these relate to credit market failures arising from the nature of R&D. The arguments are often based on the idea that there may be a lemons premium that arises because markets have inferior information to the firm. The lemons premium raises the cost of capital to the firm from the external credit market-indeed, firms may be reluctant to reveal technical information to the market because they would then find it difficult to exclude other firms from benefiting from that information.
