Understanding the Information Asymmetry Costs of R&D Investment: A Conceptual Perspective from a Market-Based Model

This paper examines how the information asymmetry costs of R&D may be manifested within firms and uses the market-based model (MBM) developed in Mandal (2025) as an interpretive framework for discussing these effects. It reviews prior literature on the channels through which R&D-related information asymmetry may reduce firm value and then applies the MBM framework to offer a possible interpretation of the inconsistent findings on the relationship between R&D and firm value. To organize this discussion, the paper introduces a simple three-point heuristic for assessing the extent to which the MBM may be relevant to different negative outcomes associated with R&D. Because the MBM has not yet been empirically tested, the paper does not claim to validate the model; rather, it uses the framework conceptually to discuss outcomes such as higher cost of capital, underpricing, insider gains, lower stock returns, and related manifestations of information asymmetry.