Capitalization Versus Expensing: Evidence on the Uncertainty of Future Earnings from Capital Expenditures Versus R&D Outlays
Posted: 17 Feb 2002
In this study, 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 roughly 50,000 firm-year observations from 1972-1997. 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 existing evidence on value relevance of R&D, should help the current discussion on accounting for R&D.
Keywords: R&D; Capitalization
JEL Classification: M41, M44
Suggested Citation: Suggested Citation