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R&D profitability, intensity and market-to-book: evidence from Australia

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  • Kamran Ahmed
  • John Hillier
  • Elisabeth Tanusasmita
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    Abstract

    Purpose – The purpose of this paper is to assess the financial disclosure vis-á-vis economic reality of research and development (R&D) expensed by Australian firms under the pre-2005 Australian generally accepted accounting principles (A-GAAP) regime via the lens of market-to-book. Design/methodology/approach – The authors estimated firms' R&D profit rate, measured R&D revenue intensity and modelled the impacts of these and related economic factors, via economic and financial disclosure channels, on market-to-book using data for 1988-2004. Findings – R&D, on average, was profit neutral and had undetectable impacts on market-to-book whether via equity valuation or financial disclosure. Research limitations/implications – Market-to-book's information content is best viewed as conditional on the reference disclosure regime. Australian firms' typically at best minimal R&D profitability is an international anomaly. Data limitations in terms of the generating process and availability mean that R&D's impact on market-to-book via financial reporting is not definitively determined. Practical implications – Restrictive rules on the capitalization of intangible asset-related expenditures under A-GAAP apparently did not adversely impact market-to-book's economic information. AIFRS's more permissive rule risks compromising market-to-book's reliability in such a role. Originality/value – For Australia, the paper is anticipated to be the first to estimate the profit rate of R&D, measure the intensity of R&D, and model R&D's influence on the market-to-book ratio. It develops a framework for the economic and financial reporting impacts of investments on a key indicator of firms' financial standing and contributes to the debate on identifiable intangibles' disclosure.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Accounting Research Journal.

    Volume (Year): 24 (2011)
    Issue (Month): 2 (September)
    Pages: 150-177

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    Handle: RePEc:eme:arjpps:v:24:y:2011:i:2:p:150-177

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    Related research

    Keywords: A-GAAP; AIFRS; Australia; Financial reporting; Intangibles; Listed companies; Market-to-book; Research and development;

    References

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    1. J. A. Hausman, 1976. "Specification Tests in Econometrics," Working papers 185, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    3. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
    4. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
    5. Yuan Ding & Hervé Stolowy & Michel Tenenhaus, 2007. "R&D productivity: an exploratory international study," Review of Accounting and Finance, Emerald Group Publishing, vol. 6(1), pages 86-101, February.
    6. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
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