The Effect of R&D Investment on Future Earnings Uncertainty: New Evidence

49 Pages Posted: 11 Jan 2012

See all articles by Weimin Wang

Weimin Wang

Saint Louis University

Feng Gu

State University of New York at Buffalo

Date Written: January 10, 2012

Abstract

The effect of R&D on firms’ future earnings uncertainty is an important factor in the decision of accounting treatment of the investment (expensing vs. capitalization). This study provides new evidence on the effect of R&D investment on future earnings uncertainty. We posit that R&D investment and future earnings uncertainty are simultaneously associated. On the one hand, high earnings uncertainty increases firms’ incentive to invest in R&D because R&D strengthens firms’ innovative capability and competitiveness in an uncertain environment. On the other hand, the outcome of R&D project is subject to uncertainty, but the advantage of R&D can also lead to durable and persistent future benefits, rendering the effect of R&D on future earnings variability an empirical question. Our examination of the simultaneous relation between R&D investment and future earnings uncertainty indicates that like capital expenditure, R&D does not increase the variability of future earnings. We also find that for firms with relatively high R&D investment intensity, R&D has a stronger effect on decreasing firms’ future earnings variability than capital expenditure. This result is in contrast to earlier evidence that R&D and capital investment increase future earnings uncertainty and that R&D has greater association with future earnings uncertainty than capital investment.

Keywords: R&D investment, future earnings uncertainty

Suggested Citation

Wang, Weimin and Gu, Feng, The Effect of R&D Investment on Future Earnings Uncertainty: New Evidence (January 10, 2012). CAAA Annual Conference 2012. Available at SSRN: https://ssrn.com/abstract=1982762 or http://dx.doi.org/10.2139/ssrn.1982762

Weimin Wang (Contact Author)

Saint Louis University ( email )

63103

Feng Gu

State University of New York at Buffalo ( email )

12 Capen Hall
School of Management
Buffalo, NY 14221

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