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Capitalization versus Expensing: Evidence on the Uncertainty of Future Earnings from Capital Expenditures versus R&D Outlays

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  • S. P. Kothari

  • Ted E. Laguerre

  • Andrew J. Leone

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.

Suggested Citation

  • S. P. Kothari & Ted E. Laguerre & Andrew J. Leone, 2002. "Capitalization versus Expensing: Evidence on the Uncertainty of Future Earnings from Capital Expenditures versus R&D Outlays," Review of Accounting Studies, Springer, vol. 7(4), pages 355-382, December.
    • Handle: RePEc:spr:reaccs:v:7:y:2002:i:4:d:10.1023_a:1020764227390
    DOI: 10.1023/A:1020764227390
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    1. Dain C. Donelson & Robert J. Resutek, 2012. "The effect of R&D on future returns and earnings forecasts," Review of Accounting Studies, Springer, vol. 17(4), pages 848-876, December.
    2. Nerissa C. Brown & Michael D. Kimbrough, 2011. "Intangible investment and the importance of firm-specific factors in the determination of earnings," Review of Accounting Studies, Springer, vol. 16(3), pages 539-573, September.
    3. Yanfeng Xue, 2007. "Make or buy new technology: The role of CEO compensation contract in a firm’s route to innovation," Review of Accounting Studies, Springer, vol. 12(4), pages 659-690, December.
    4. Dain C. Donelson & Robert J. Resutek, 2015. "The predictive qualities of earnings volatility and earnings uncertainty," Review of Accounting Studies, Springer, vol. 20(1), pages 470-500, March.
    5. Marlene Plumlee & Yuan Xie & Meng Yan & Jeff Jiewei Yu, 2015. "Bank loan spread and private information: pending approval patents," Review of Accounting Studies, Springer, vol. 20(2), pages 593-638, June.
    6. Shu-Ching Chou & Yu-Hsiu Cheng & Yenn-Ru Chen, 2025. "Grabbing or helping hand? The impact of government subsidies on innovation and performance for firms in cultural and creative industries," Review of Quantitative Finance and Accounting, Springer, vol. 64(4), pages 1719-1755, May.
    7. Masako Darrough & Jianming Ye, 2007. "Valuation of loss firms in a knowledge-based economy," Review of Accounting Studies, Springer, vol. 12(1), pages 61-93, March.
    8. Di Qi & Wen Chen, 2025. "R&D narrative disclosure and semantic similarity: evidence from China," Economic Change and Restructuring, Springer, vol. 58(5), pages 1-38, October.

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