Capitalization versus Expensing: Evidence on the Uncertainty of Future Earnings from Capital Expenditures versus R&D Outlays |
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Authors: | Kothari S P Laguerre Ted E Leone Andrew J |
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Institution: | (1) Baruch College-CUNY, One Bernard Baruch Way, New York, NY 10010, USA |
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Abstract: | We propose and implement a new method to estimate the relation between R&D investments 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 should help the current discussion on accounting for R&D and the methodology might be helpful in standard setting in other contexts as well. |
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Keywords: | R& D earnings reliability capitalization |
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