Accounting Treatment of R&D Expenditures and Firm-Specific Characteristics of the R&D Capital

Abstract

This paper investigates the economic determinants of the R&D economic asset of the firm estimated from past information of R&D expenditures. The study applies the cost basis framework, earlier used for instance by Chan et al. (2001) and Chambers et al. (2001) to estimate the proportion of R&D costs of the firm that represents the investments in R&D capital. The study investigates how different firm-specific characteristics like R&D intensity, profitability, sales growth, size and risk are associated with the ratio of the economic R&D asset to the difference between the market and book value of equity, i.e. the R&D capital ratio. This study extends the current literature by investigating the proportion of R&D costs that represents investment in R&D capital in different countries and industries. The results give evidence that the estimated proportion of the R&D expenses that represents investments in R&D capital is large in all countries and industries. The results also indicate that the ratio of the economic R&D asset to the difference between the market and book value of equity can be explained by different firm-specific characteristics, especially profitability and growth. This study gives international and industry-specific evidence that the R&D capital ratio makes economic sense and thus contributes to the literature that investigates the economic relevance of the R&D capital, especially Ballester et al. (2002).

Keywords: R&D economic asset, cost basis method, firm-specific characteristics, international evidence