Capitalization Versus Expensing: Evidence on the Uncertainty of Future Earnings from Current Investments in Pp&E Versus R&D

32 Pages Posted: 2 Feb 1999

See all articles by S.P. Kothari

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Ted E. Laguerre

Analysis Group, Inc.

Andrew J. Leone

University of Miami

Date Written: December 1998

Abstract

Accounting standards reflect a trade-off between relevance and reliability. This trade-off is intensely debated in the context of the accounting standard for R&D costs. However, almost all of the empirical research focuses only on the relevance of accounting disclosures about R&D costs. Little systematic evidence exists on the reliability of future benefits from R&D outlays. We propose and implement a new method to estimate the relation between investments in R&D and the uncertainty of future benefits from those investments. The empirical analysis compares the relative contributions of current investments in R&D and PP&E to future earnings variability using a sample of more than 50,000 firm-year observations. Evidence is strongly consistent with the hypothesis that R&D investments generate future benefits that are far more uncertain than benefits from investments in PP&E. Our results, together with the evidence on value relevance of R&D from previous research, should be helpful in the current discussion on accounting for R&D.

JEL Classification: M41, M44

Suggested Citation

Kothari, S.P. and Laguerre, Ted E. and Leone, Andrew J., Capitalization Versus Expensing: Evidence on the Uncertainty of Future Earnings from Current Investments in Pp&E Versus R&D (December 1998). Simon School of Business Working Paper FR 99-02. Available at SSRN: https://ssrn.com/abstract=146211 or http://dx.doi.org/10.2139/ssrn.146211

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-325
Cambridge, MA 02142
United States
617-253-0994 (Phone)
617-253-0603 (Fax)

Ted E. Laguerre

Analysis Group, Inc. ( email )

1 Brattle Square
Fifth Floor
Cambridge, MA 02138
United States

Andrew J. Leone (Contact Author)

University of Miami ( email )

School of Business
Coral Gables, FL 33146
United States
305-284-3101 (Phone)

HOME PAGE: http://sbaleone.bus.miami.edu

Register to save articles to
your library

Register

Paper statistics

Downloads
2,121
Abstract Views
9,356
rank
6,509
PlumX Metrics