Capitalization versus expensing: Evidence on the uncertainty of future earnings from capital expenditures versus R&D outlays

S. P. Kothari, Ted E. Laguerre, Andrew Leone

Research output: Contribution to journalArticle

304 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)355-382
Number of pages28
JournalReview of Accounting Studies
Volume7
Issue number4
StatePublished - 2002
Externally publishedYes

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Keywords

  • Capitalization
  • Earnings reliability
  • R&D

ASJC Scopus subject areas

  • Business, Management and Accounting(all)

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