The Association between the Uncertainty of Future Economic Benefits and Current R&D and Capital Expenditures: Industry and Intertemporal Analyses

47 Pages Posted: 14 Jul 2005

See all articles by Eli Amir

Eli Amir

Tel Aviv University

Yanling Guan

Hong Kong Baptist University (HKBU) - Department of Accountancy & Law

Gilad Livne

University of Exeter Business School

Date Written: June 2005

Abstract

Since 1974, R&D expenditures have been fully expensed when incurred partly because R&D activities are claimed to be associated with a high degree of uncertainty in future economic benefits. In this study, we estimate the association between R&D expenditures and capital expenditures (CAPEX) and the variance of future earnings per share and operating income. We show that R&D expenditures lead to higher volatility of future earnings than capital expenditures only in R&D-intensive industries, where industry R&D intensity is measured as the R&D-to-CAPEX ratio. We also find that the stronger association of R&D with uncertainty in future earnings is a recent phenomenon. Finally, we show that in industries that are relatively less dependent on R&D activities, the probability of recovering R&D expenditures is similar to that of capital expenditures. Overall, our results suggest that while some industries engage in a more innovative and uncertain R&D activities, R&D in other industries is less uncertain. These results suggest that the impact of R&D on future performance considerably varies across industries and time periods.

Keywords: R&D, capitalization

JEL Classification: M41, O32

Suggested Citation

Amir, Eli and Guan, Yanling and Livne, Gilad, The Association between the Uncertainty of Future Economic Benefits and Current R&D and Capital Expenditures: Industry and Intertemporal Analyses (June 2005). Cass Business School Research Paper, Available at SSRN: https://ssrn.com/abstract=755524 or http://dx.doi.org/10.2139/ssrn.755524

Eli Amir (Contact Author)

Tel Aviv University ( email )

312 Recanati Bldg.
69978 Tel Aviv
Israel
+972 3 640-8510 (Phone)
+972 3 640-7738 (Fax)

Yanling Guan

Hong Kong Baptist University (HKBU) - Department of Accountancy & Law ( email )

Kowloon Tong, Kowloon
Hong Kong

Gilad Livne

University of Exeter Business School ( email )

Streatham Court
Rennes Drive
Exeter, EX4 4JH
United Kingdom
+44(0)1392 724436 (Phone)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
216
Abstract Views
1,483
rank
154,432
PlumX Metrics