Capitalization versus Expensing: Evidence on the Uncertainty of Future Earnings from Capital Expenditures versus R&D Outlays
- Cite this article as:
- Kothari, S.P., Laguerre, T.E. & Leone, A.J. Review of Accounting Studies (2002) 7: 355. doi:10.1023/A:1020764227390
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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.