Capitalization Versus Expensing: Evidence on the Uncertainty of Future Earnings from Capital Expenditures Versus R&D Outlays

Posted: 17 Feb 2002

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

Abstract

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

Kothari, S.P. and Laguerre, Ted E. and Leone, Andrew J., Capitalization Versus Expensing: Evidence on the Uncertainty of Future Earnings from Capital Expenditures Versus R&D Outlays. Review of Accounting Studies, December 2002. Available at SSRN: https://ssrn.com/abstract=298699

S.P. Kothari (Contact Author)

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

University of Miami ( email )

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

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

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