The Association of R&D and Capital Expenditures with Subsequent Earnings Variability

• Published in: Journal of business finance & accounting 2007-01, Vol.34 (1-2), p.222-246
• Main Authors: Amir, Eli, Guan, Yanling, Livne, Gilad
• Format: Article
• Language: English
• Subjects: Accounting standards; Assets; Business studies; Capital costs; Capital expenditures; capital expenditures (CAPEX); Corporate finance; Correlation analysis; Earnings; earnings variability; Financial research; industry analysis; Research & development expenditures; Research and development; research and development (R&D); SFAS 2; Studies
• ISSN: 0306-686X; 1468-5957
• DOI: 10.1111/j.1468-5957.2006.00651.x

:  We estimate the association of investments in R&D and in physical assets (CAPEX) with subsequent earnings variability. We estimate these relations in different time periods and across industries. We find that R&D contributes to subsequent earnings variability more than CAPEX only in relative R&D‐intensive industries – industries in which R&D is relatively more intensive than physical capital. In physical assets‐intensive industries, we do not find similar relations. The findings suggest that with respect to subsequent earnings variability, fundamental differences between investment information about R&D and CAPEX exist. However, they are mainly noticeable in firms that operate in relatively R&D‐intensive industries. The evidence also suggests there was a shift in the relations between R&D and CAPEX over time. Our findings contribute to the debate on accounting for R&D expenditures.