This paper examines whether stock prices fully reflect the value of firms' intangible assets, particularly research and development (R&D) expenditures. The authors find that historically, the stock returns of firms doing R&D have averaged similar to those of firms with no R&D. However, within the set of growth stocks, R&D-intensive stocks tend to outperform those with little or no R&D. Companies with high R&D relative to equity market value, who tend to have poor past returns, show strong signs of mispricing. The market appears to fail to give sufficient credit for firms' R&D investments. The authors also find that R&D intensity is positively associated with return volatility, and that increased accounting disclosure may be beneficial. The paper also explores the effects of advertising on returns and finds similar results. The authors find that R&D activity represents a significant and growing portion of firm resources, with several industries being highly R&D intensive. The practice of immediately expensing R&D outlays can have a substantial distortionary effect on earnings. The accumulated stock of R&D capital can represent a major intangible asset relative to the reported book value of equity. If investors mechanically arrive at valuations based on such reported earnings or book values, the degree of mispricing can be substantial. The paper investigates whether the stock market appropriately accounts for firms' expenditures on R&D. The authors find that the average return on the two sets of stocks is comparable. Stocks in the R&D sample have an average annual return of 19.65 percent over the three-year period after portfolio formation, compared to 19.50 percent for firms with zero R&D. The absence of any differences is consistent with the notion that the market price on average incorporates fully the benefits of R&D spending. The paper also finds that R&D-intensive stocks tend to have low book-to-market ratios and that the market may not fully recognize the value of these firms' investments in R&D. The authors conclude that the market may not fully account for the value of R&D expenditures and that increased accounting disclosure may be beneficial.This paper examines whether stock prices fully reflect the value of firms' intangible assets, particularly research and development (R&D) expenditures. The authors find that historically, the stock returns of firms doing R&D have averaged similar to those of firms with no R&D. However, within the set of growth stocks, R&D-intensive stocks tend to outperform those with little or no R&D. Companies with high R&D relative to equity market value, who tend to have poor past returns, show strong signs of mispricing. The market appears to fail to give sufficient credit for firms' R&D investments. The authors also find that R&D intensity is positively associated with return volatility, and that increased accounting disclosure may be beneficial. The paper also explores the effects of advertising on returns and finds similar results. The authors find that R&D activity represents a significant and growing portion of firm resources, with several industries being highly R&D intensive. The practice of immediately expensing R&D outlays can have a substantial distortionary effect on earnings. The accumulated stock of R&D capital can represent a major intangible asset relative to the reported book value of equity. If investors mechanically arrive at valuations based on such reported earnings or book values, the degree of mispricing can be substantial. The paper investigates whether the stock market appropriately accounts for firms' expenditures on R&D. The authors find that the average return on the two sets of stocks is comparable. Stocks in the R&D sample have an average annual return of 19.65 percent over the three-year period after portfolio formation, compared to 19.50 percent for firms with zero R&D. The absence of any differences is consistent with the notion that the market price on average incorporates fully the benefits of R&D spending. The paper also finds that R&D-intensive stocks tend to have low book-to-market ratios and that the market may not fully recognize the value of these firms' investments in R&D. The authors conclude that the market may not fully account for the value of R&D expenditures and that increased accounting disclosure may be beneficial.