The Association between the Uncertainty of Future Economic Benefits and Current R&D and Capital Expenditures : Industry and Intertemporal Analyses

Since 1974, Ramp;D expenditures have been fully expensed when incurred partly because Ramp;D activities are claimed to be associated with a high degree of uncertainty in future economic benefits. In this study, we estimate the association between Ramp;D expenditures and capital expenditures (CAPEX) and the variance of future earnings per share and operating income. We show that Ramp;D expenditures lead to higher volatility of future earnings than capital expenditures only in Ramp;D-intensive industries, where industry Ramp;D intensity is measured as the Ramp;D-to-CAPEX ratio. We also find that the stronger association of Ramp;D with uncertainty in future earnings is a recent phenomenon. Finally, we show that in industries that are relatively less dependent on Ramp;D activities, the probability of recovering Ramp;D expenditures is similar to that of capital expenditures. Overall, our results suggest that while some industries engage in a more innovative and uncertain Ramp;D activities, Ramp;D in other industries is less uncertain. These results suggest that the impact of Ramp;D on future performance considerably varies across industries and time periods